Jefferson, Charles E v. United States ( 2008 )

In the
United States Court of Appeals
For the Seventh Circuit
No. 06-4082
C HARLES E. JEFFERSON,
Plaintiff-Appellant,
v.
U NITED S TATES OF A MERICA,
Defendant-Appellee.
Appeal from the United States District Court
for the Northern District of Illinois, Western Division.
No. 04 C 50291—Philip G. Reinhard, Judge.
A RGUED JANUARY 18, 2008—D ECIDED O CTOBER 8, 2008
Before B AUER, W ILLIAMS, and S YKES, Circuit Judges.
W ILLIAMS, Circuit Judge. Charles E. Jefferson previously
served as the president of the board of directors of a day
care center that owed substantial back taxes to the Internal
Revenue Service. After Jefferson was personally assessed
for the back taxes, he filed suit to recover the amounts
he paid to the IRS. The district court granted the govern-
ment’s motion for summary judgment, finding that
Jefferson could be assessed for the day care’s tax liability.
Because Jefferson is a “responsible person” under 26 U.S.C.
2 No. 06-4082
§ 6672(a) who “willfully” failed to pay the day care’s taxes,
we agree with the district court, and we affirm.
I. BACKGROUND
Jefferson serves as a state representative in the Illinois
House of Representatives, and until 2001, he served as
president of the board of directors of New Zion Day Care
Center, Inc., a Rockford, Illinois day care facility. Jefferson
filed suit against the IRS to recover a trust fund penalty
of $41,432 that the IRS assessed and collected from him
after New Zion failed to remit federal payroll taxes to
the IRS for the second, third, and fourth quarters of 2000,
and the first and second quarters of 2001.
Jefferson’s position as board president from the early
1980s until June 2001 was voluntary and uncompensated.
He and the other board members were responsible for the
direction of the day care, while Velma Hayes, the paid
director of New Zion from 1982 until 2001, ran New Zion’s
day-to-day operations. As a board member, Jefferson had
the authority to direct and authorize payment of New
Zion’s bills, to authorize payment of its federal tax depos-
its, to determine its financial policy, and to obtain loans
for New Zion, such as the loan he obtained in 1998 for
a new day care building. Jefferson was also a signatory
on New Zion’s bank accounts and co-signed checks on
behalf of New Zion.
The day care was funded in part by the United Way
organization. In February 1998, the Executive Director of
the United Way informed Jefferson that New Zion was not
No. 06-4082 3
properly paying its payroll taxes. After New Zion lost its
United Way funding, partly because of the unpaid taxes,
Jefferson secured a loan on New Zion’s behalf so the day
care could pay the delinquent taxes. On August 31, 2000,
Jefferson co-signed two checks payable to the IRS, indicat-
ing that the checks were for penalty and interest. After
the 1998 delinquency, the board retained an accounting
firm and ordered Hayes to pay any taxes that New Zion
owed to the IRS.
By 2000, New Zion’s financial condition was precarious,
and it failed to pay income and FICA taxes for its employ-
ees from April 2000 to June 2001. Hayes informed the
board, including Jefferson, at its monthly meetings that the
day care was unable to pay its bills and tax liabilities. She
also provided the board members with a copy of her
“director’s report” and a “financial report,” and she
maintained a file with the financial reports at New Zion’s
office. Jefferson was aware of this file and instructed
board members to review the financial reports at each
meeting before they were accepted by a majority vote.
On May 13, 2002, the IRS made assessments against
Jefferson and Hayes for the delinquent tax payments.
Jefferson filed suit in the district court to reclaim the
$41,432 he paid to the IRS. The court denied Jefferson’s
motion for summary judgment and granted the govern-
ment’s motion for summary judgment, finding that
Jefferson was a “responsible person” under 26 U.S.C.
§ 6672 and that he “willfully” failed to pay taxes. The court
also found that Jefferson did not qualify for the “honorary
member” exception of section 6672(e) because he was not
4 No. 06-4082
serving in an honorary capacity at New Zion. Finally, the
court determined that section 904(b) of Public Law 104-168
did not preclude the government from assessing tax
liabilities although it failed to develop materials ex-
plaining the circumstances in which Jefferson incurred the
tax liability. Jefferson appeals.
II. ANALYSIS
We review the district court’s grant of summary judg-
ment de novo. Peirick v. Ind. Univ.-Purdue Univ. Indianapolis
Athletic Dep’t, 510 F.3d 681, 687 (7th Cir. 2007). When, as
in this case, the parties have filed cross-motions for sum-
mary judgment, “we construe the evidence and all reason-
able inferences in favor of the party against whom the
motion under consideration is made.” Samuelson v. Laporte
Cmty. Sch. Corp., 526 F.3d 1046, 1051 (7th Cir. 2008). Sum-
mary judgment is appropriate only when the materials
before the court demonstrate “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).
A. Jefferson was liable for New Zion’s tax liability
because Jefferson was a responsible person
whose behavior was willful.
1. Jefferson is a “responsible person” under
section 6672.
26 U.S.C. § 6672(a) makes any person who is responsible
for collecting, accounting for, and paying payroll taxes but
No. 06-4082 5
who “willfully” fails to do any of these things “liable to a
penalty equal to the total amount of tax evaded, or not
collected, or not accounted for and paid over.” An individ-
ual is considered “responsible” if “he retains sufficient
control of corporate finances that he can allocate corporate
funds to pay the corporation’s other debts in preference
to the corporation’s withholding tax obligations.” Bowlen
v. United States, 956 F.2d 723, 728 (7th Cir. 1992) (internal
citation omitted). However, a person need not necessarily
have “exclusive control over the disbursal of funds or have
the final word as to which creditors should be paid so
long as he has significant control” because “the key to
liability under section 6672 is the power to control the
decision-making process by which the employer corpora-
tion allocates funds to other creditors in preference to
its withholding tax obligations.” Id. (internal citations
omitted).
Jefferson argues that he is not a “responsible” person
because he did not run the day-to-day operations of New
Zion nor did he handle its financial affairs. We have
held that “merely because a corporate officer has
check-signing responsibilities and his corporation is in
financial trouble, it does not follow that he can be held
liable for any and all failures to pay withholding taxes,”
Wright v. United States, 809 F.2d 425, 428 (7th Cir. 1987), but
Jefferson had significant involvement in New Zion’s
financial affairs that included more than simply writing
checks. He was board president, and had secured loans
for New Zion and directed payment of its taxes in the past.
See Domanus v. United States, 961 F.2d 1323, 1324-25 (7th
Cir. 1992) (member of the board of directors who was
6 No. 06-4082
responsible for directing payment of the taxes held to be
a responsible person). He retained an accounting firm to
review the day care’s financial situation, and he also
reviewed the day care’s financial reports at each meeting.
See Barnett v. IRS, 988 F.2d 1449, 1457 (5th Cir. 1993)
(president of a corporation who asked for monthly reports
on the company’s financial situation is a “responsible
person” despite president’s geographical separation
from the office where payroll and tax matters are handled).
Even though Jefferson was not involved in the day-to-day
operations of the day care, he had significant involve-
ment in the financial affairs of the day care sufficient to
make him a “responsible person.” 1
1
Jefferson points to our decision in United States v. Running, 7
F.3d 1293 (7th Cir. 1993), for the proposition that we can only
consider Jefferson’s behavior in the relevant fiscal quarters in
which liability was assessed in determining if Jefferson is a
“responsible person.” In Running, however, the defendant was
employed at the institution responsible for the taxes for only one
month during the relevant fiscal period. See id. at 1298 (finding
that the defendant was a responsible person despite his brief
tenure). It made sense for us to consider only the time in which
Running was employed by the institution responsible for the
taxes in determining if Running was a responsible person. In
contrast, Jefferson was involved with the day care for over
twenty years and unlike the defendant in Running, there is no
evidence that Jefferson’s involvement with managing the day
care’s finances ceased at any time before or during the relevant
fiscal period. Cf. id. at 1299 (finding that the defendant’s
behavior was not willful because the government produced no
(continued...)
No. 06-4082 7
2. Jefferson’s behavior was willful.
We have defined the term “willful” in the context of
section 6672 to mean “voluntary, conscious and inten-
tional—as opposed to accidental—decisions not to remit
funds properly withheld to the Government.” Domanus,
961 F.2d at 1324. The record indicates that the day care
was, in some respect, trying to address the issue of the
taxes. Jefferson hired an accounting firm after the initial
1998 delinquency and directed Hayes to pay whatever
taxes were owed.
Nevertheless, a person’s behavior is also “willful” under
the statute when that person “recklessly disregarded a
known risk that the taxes were not being paid over.” United
States v. Kim, 111 F.3d 1351, 1357 (7th Cir. 1997). There is
substantial evidence in the record that Jefferson, despite
his efforts to address earlier tax deficiencies, ignored later
signs that the taxes were still unpaid. Jefferson claims that
he was unaware that the taxes were not being paid and
in fact, only signed two checks out of the more than
975 checks issued by New Zion during the relevant fiscal
quarters. Those two checks, however, were to the IRS for
back taxes/penalties. Indeed, the record suggests that
Jefferson was not only aware of New Zion’s history of tax
payment problems, but he was also aware of its current
1
(...continued)
evidence that Running was responsible for preparing or filing
the company’s tax returns once he left). Moreover, Jefferson
wrote two checks to the IRS for penalties and back taxes
during the relevant fiscal period.
8 No. 06-4082
state—Hayes generated monthly reports that were
given to Jefferson and the other board members at each
meeting, reports that showed a steadily increasing tax
liability.2 Moreover, Hayes repeatedly informed the
board that the day care was having difficulty paying
its bills, including its tax obligations.
By failing to heed these warnings, Jefferson recklessly
disregarded a known risk that the taxes were not being
paid. It is irrelevant whether Jefferson knew the taxes were
going unpaid, as he claims. See id. at 1357-58 (where a
responsible person was deemed to have acted “willfully”
in his failure to pay taxes for past quarters, even though he
was unaware at that time that the taxes were going un-
paid). There is sufficient evidence in the record that he
disregarded a known risk given the day care’s past trouble
with the IRS, Hayes’s monthly reports to the board that
2
Jefferson argues that there is some dispute in the record
whether Hayes generated monthly financial reports to the
board during the relevant fiscal periods because there is no
evidence in the record that the board voted on and approved
any reports during that time period. It is not clear whether
Jefferson is arguing that these reports were never prepared or
simply never generated to the board during the relevant time
period. However, Jefferson admitted during his deposition
that the accounting firm prepared financial reports every three
months and that these reports would have been available to the
board. Furthermore, Jefferson stated that at the time that he
wrote the checks to the IRS for back taxes and penalties, which
was during the relevant fiscal periods, he would have been
aware that there were outstanding liabilities due to the IRS.
No. 06-4082 9
the day care could not cover its expenses, and the reports
generated by the accounting firm detailing the day care’s
deteriorating financial situation. Wright, 809 F.2d at 428 (“if
a responsible officer knows that the corporation has
recently committed such a delinquency and knows that
since then its affairs have continued to deteriorate, he
runs the risk of being held liable if he fails to take any
steps either to ascertain, before signing checks, what the
state of the tax withholding account is, or to institute
effective financial controls to guard against nonpayment”);
Running, 7 F.3d at 1299 (“Recklessness may also be estab-
lished if a responsible person fails ‘to correct mismanage-
ment after being notified that the withholding taxes
have not been duly remitted.’ ”) (citation omitted).
Like all board members, Jefferson had access to the files
showing the steadily increasing tax liability, but beyond
Jefferson’s directive to Hayes to pay the taxes, there is no
evidence that the board took steps or implemented proce-
dures to ensure that the taxes were actually being paid.
These factors make Jefferson’s failure to pay taxes “willful”
as a matter of law. See id.B. Jefferson is not exempt from the trust fund
recovery penalty.
Jefferson argues that he should not have been assessed
for the trust fund penalty because he was an honorary
and voluntary board member for New Zion who was not
involved in the day care’s day-to-day operations. 28 U.S.C.
§ 6672(e) provides that:
10 No. 06-4082
No penalty shall be imposed by subsection (a) on
any unpaid, volunteer member of any board of
trustees or directors of an organization exempt
from tax under Subtitle A if such member—
(1) is solely serving in an honorary capac-
ity,
(2) does not participate in the day-to-day
or financial operations of the organizations,
and
(3) does not have actual knowledge of the
failure on which such penalty is imposed.
While there is not much caselaw discussing this subsec-
tion of the statute, there is considerable overlap in deter-
mining if a person is an “honorary member” under section
6672(e) and determining if a person is “responsible” under
section 6672(a). By definition, an individual serving in an
honorary capacity and therefore exempt from tax liability
cannot be a responsible person. See 28 U.S.C. § 6672(e)
(stating that individuals who do not participate in the
“financial operations of the organizations” are exempt
from tax liability); Bowlen, 956 F.2d at 728 (responsible
person retains “sufficient control of corporate finances”).
Furthermore, it is undisputed that Jefferson had control
over whether the taxes were paid which, as discussed
above, undermines his argument that he did not partici-
pate in the financial operations of the day care. Given
Jefferson’s power over the day care’s financial situation
(co-signatory on checks, approval of financial statements,
ability to get loans), it is clear that he was not serving
No. 06-4082 11
solely in an honorary capacity as president of the board of
directors.
Jefferson also claims that he did not have “actual knowl-
edge of the failure on which such penalty is imposed,” but
even if true, this still does not bring him within the pur-
view of section 6672(e). His failure to implement ade-
quate mechanisms to ensure that the taxes were being
paid and his reckless disregard of Hayes’s warnings that
the day care’s bills were not being paid are actions that led
to the injury that the government complains of here. The
term “honorary” suggests a lack of power, a lack of
responsibility, and a corresponding lack of ability to do
harm—factors that do not apply to the instant case.
C. The IRS is not estopped from assessing the tax
against Jefferson.
Jefferson argues that the government’s failure to comply
with section 904(b) precludes application of the penalty
under section 6672(a). The district court rejected this
argument on the grounds that the language of section
904(b) does not place any restrictions on section 6672(a).
Section 904(b) reads, in pertinent part:
(1) The Secretary of the Treasury . . . shall take such
actions as may be appropriate to ensure that
employees are aware of their responsibilities under
the Federal tax depository system, the circum-
stances under which employees may be liable for
the penalty imposed by section 6672 of the Internal
Revenue Code of 1986, and the responsibility to
12 No. 06-4082
promptly report to the Internal Revenue Service
any failure referred to in subsection (a) of such
section 6672. Such actions shall include—
(A) printing of a warning on deposit cou-
pon booklets and the appropriate tax re-
turns that certain employees may be liable
for the penalty imposed by such section
6672, and
(B) the development of a special informa-
tion packet.
(2) Development of explanatory materials.— The
Secretary shall develop materials explaining the
circumstances under which board members of
tax-exempt organizations (including voluntary and
honorary members) may be subject to penalty
under section 6672 of such Code. Such materials
shall be made available to tax-exempt organiza-
tions.
104 P.L. 168, 904(b)(1)-(2). It is undisputed that the Secre-
tary has not developed the requisite materials as required
by section 904(b)(2); the issue is whether this is a condition
precedent to the government’s collection of back taxes
under section 6672(a).
“When interpreting statutes, ‘we give words their plain
meaning unless doing so would frustrate the overall
purpose of the statutory scheme, lead to absurd results, or
contravene clearly expressed legislative intent.’ ” Gillespie
v. Equifax Info. Servs., LLC, 484 F.3d 938, 941 (7th Cir.
2007) (citing United States v. Davis, 471 F.3d 783, 787 (7th
No. 06-4082 13
Cir. 2006) (internal citation omitted)). The language of
section 904(b)(2) is written using the mandatory term
“shall” (“The Secretary shall develop materials . . .”) which
means that the promulgation of these materials was not
optional. See Nat’l Ass’n of Home Builders v. Defenders
of Wildlife, 127 S. Ct. 2518, 2532 (2007) (“As used in
statutes . . . this word [shall] is generally imperative or
mandatory”) (citing Black’s Law Dictionary 1375 (6th ed.
1990)); Pittway Corp. v. United States, 102 F.3d 932, 934 (7th
Cir. 1996) (“All statutory interpretation begins with the
language of the statute itself, and where ‘the statute’s
language is plain, the sole function of the courts is to
enforce it according to its terms.’ ”) (citing United States v.
Ron Pair Enterprises, Inc., 489 U.S. 235, 241(1989) (internal
citation and quotation marks omitted)).
In In re Matter of Carlson, 126 F.3d 915, 922 (7th Cir. 1997),
which the district court relied on, the plaintiffs claimed
that the cost of their son’s medical care constituted a
reasonable cause that excused payment of a tax penalty.
Id. In support of this proposition, the plaintiffs relied on
the IRS manual, which discussed circumstances in which
it may be appropriate for the IRS to delay the collection
of a penalty. Id. We rejected this argument, holding that
the rules adopted for the internal administration of the
IRS are not for the protection of the taxpayer so noncom-
pliance with the IRS manual does not render the action of
the IRS invalid. Id. The provision here, however, is differ-
ent. Styled the “Taxpayer Bill of Rights 2” and passed in
1996, this statute was intended to provide further
protections to taxpayers by establishing the Office of the
14 No. 06-4082
Taxpayer Advocate and provide for greater protections for
taxpayers in a host of different areas. 104 P.L. 168 (1996).
Even though section 904(b) was adopted for the protec-
tion of the taxpayer, we decline to adopt a blanket rule
that the IRS’s failure to comply with section 904(b) auto-
matically renders its actions invalid. Such a rule would
estop the IRS from collecting an otherwise lawful penalty
from individuals who were not prejudiced by the IRS’s
failure to promulgate these materials. In Pittway, for
example, the IRS failed to pass regulations interpreting a
statute after a mandate to do so from Congress fifteen
years earlier, but we held that the plaintiff was still
liable under the plain language of the statute. 102 F.3d at
936. We noted, however, that “in a statute less clear on its
face, failure to promulgate regulations as Congress orders
could result in a provision not enforceable due to the
Secretary’s failure.” Id. To avoid circumventing the IRS’s
lawful functions, we have required that the taxpayer
show prejudice where the IRS has violated its regulations
or congressional statutes in attempting to collect taxes or
penalties. See In re Carlson, 126 F.3d at 922 (adhering to the
general principle that “[p]rocedures in the Internal Reve-
nue Manual . . . do not confer rights on taxpayers” but
finding that there may be circumstances in which undue
hardships, because of the IRS’s lapse, may justify a per-
son’s failure to pay taxes); see also Philadelphia & Reading
Corp. v. Beck, 676 F.2d 1159, 1163 (7th Cir. 1982) (finding
that assessments made against a taxpayer should be
enjoined where the IRS did not comply with the statutory
notice requirements and this violation prevented the
taxpayer from seeking relief in the Tax Court, but finding
No. 06-4082 15
that an injunction is not required where the “taxpayer
has no interest in contesting its taxes in the Tax Court
and there is no other irreparable hardship caused by a
violation”). Consistent with this precedent, we find that if
the IRS’s failure to promulgate documents which it was
legally obligated to provide prejudices the taxpayer, this
failure precludes application of the penalty.
While it is certainly unfortunate that the IRS has failed
to develop these materials in the more than ten years
since this statute was passed, Jefferson has not shown any
prejudice from the IRS’s failure to provide these docu-
ments. Indeed, New Zion has previously faced tax liability
and nothing was said about the IRS’s failure to promulgate
these materials at that time. Jefferson has not shown that
had he been in possession of these materials, he would
have paid the tax; instead, his argument on appeal is that
he did not know of New Zion’s escalating tax liabilities.
Therefore, we find that the IRS is not estopped from
recovering the penalty against Jefferson.
D. The IRS’s failure to turn over evidence does not
preclude summary judgment.
Finally, Jefferson argues that the IRS’s failure to turn over
evidence raises an issue of material fact that precludes
summary judgment. Jefferson claims that it is possible
the missing evidence would definitively show he was
an honorary board member and that he had no actual
knowledge of New Zion’s unpaid payroll taxes. However,
given his extensive involvement in New Zion’s financial
affairs and his reckless disregard of the day care’s escalat-
16 No. 06-4082
ing tax liability, we are not persuaded that this evidence
would have had any impact on Jefferson’s liability.
Jefferson also argues that the IRS lost documents relevant
to other New Zion board members. While section 6672(d)
allows contribution from other “responsible” persons,
Jefferson has not shown that the assessment against him
was without foundation, that these documents would
exculpate him, or that any of the other board members
were involved with New Zion’s financial affairs to the
same extent as him and Hayes. See 330 West Hubbard
Restaurant Corp. v. United States, 203 F.3d 990, 995 (7th Cir.
2000) (“the IRS’s tax assessment is presumed correct”);
Ruth v. United States, 823 F.2d 1091, 1094 (7th Cir. 1987) (“In
general, courts will not look behind an assessment to
evaluate the procedure and evidence used in making the
assessment. Rather, courts conduct a de novo review of the
correctness of the assessment, imposing the risk of
nonpersuasion on the taxpayer.”) (internal citation omit-
ted). Because of the overwhelming evidence in the record
that Jefferson was properly assessed as a “responsible
person” and further, that he turned a blind eye to New
Zion’s increasing tax liabilities, we are simply not per-
suaded that these documents would make any differ-
ence in the outcome.
III. CONCLUSION
The judgment of the district court is AFFIRMED.
10-8-08