Opinion
Civil No. 4-01-CV-70321
February 4, 2003
MEMORANDUM OPINION, RULING GRANTING DEFENDANT/COUNTER-CLAIMANT'S MOTION FOR SUMMARY JUDGMENT, AND ORDERS
Plaintiff James L. Carlson filed a complaint seeking judicial review of a "Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330" pursuant to 26 U.S.C. (I.R.C.) § 6330(d) (2001). Specifically, Carlson contests the trust fund recovery penalty assessed against him for failure to pay employment withholding taxes in the second quarter of 1995 and the first and second quarters of 1996. Defendant United States of America ("the government") filed a counterclaim against Carlson and Sidney Wilson, Carlson's business partner, pursuant to I.R.C. § 6672, seeking to reduce the penalty at issue to judgment. Wilson filed a third-party counterclaim against the United States seeking a determination that he is not a proper party for the assessment of withholding taxes by the government. The government moves for summary judgment on its counterclaim. Carlson and Wilson filed resistances, and the government filed a reply to Carlson's resistance. None of the parties requested oral argument.
Since the motion was submitted, the court has been informed that the government and Sidney Wilson have resolved the issue of Wilson's liability. I will therefore address the government's motion only as it pertains to Carlson.
I. Background
The following facts relevant to this motion either are not in dispute or are viewed in a light most favorable to Carlson. Sometime in 1992, Carlson approached Wilson about forming a company to build homes in a gated community on a golf course. Carlson had previously owned and operated two home building construction companies. Wilson, who previously worked for Carlson, located property and presented the development idea to investors. In late 1992, Carlson and Wilson formed Carwil, Inc. ("Carwil") to build residential properties and develop Glen Oaks, a new subdivision in West Des Moines, Iowa.
The parties variously refer to the company as "Carwil" and "Carwill."
Carlson was primarily responsible for building properties, and also handled the financial aspects and the day-to-day management of the business. Wilson was primarily involved in sales, attracting customers and initially obtaining money from investors. Throughout the life of the business, Carlson and Wilson were each 50% owners, officers, and employees of the company. Each was paid a salary. Carlson concedes that he was responsible for withholding and paying over to the government unpaid federal withholding taxes for Carwil at all relevant time periods.
Beginning in late 1995, Carwil experienced cash flow problems due to lack of sales. Carlson decided during this time to forego depositing the withholding taxes with the government. He also decided to pay some creditors and directed that those creditors be paid rather than paying the Internal Revenue Service (IRS). Carlson made this decision believing that the IRS would be slower to resort to collection actions than the other creditors if they were not paid. Accordingly, during the time that the delinquent taxes were accruing, other creditors were being paid, as well as Carwil's employees, including Carlson and Wilson, so that the company could continue to operate.
In late 1995 or early 1996, Liberty Bank verbally authorized a loan to Carwil. The bank subsequently refused to complete the transaction and loan the promised funds to Carwil. At about the same time, Wilson provided to Carlson a list of prospective customers, which contained the names of individuals allegedly interested in purchasing homes in Glen Oaks. Carlson later learned that no one on the list was interested in purchasing a home. In addition, Wilson, according to Carlson, diverted several thousands dollars of corporate assets to himself by checks written on the corporate account to himself and to Glen Oaks County Club to pay his business entertainment expenses at the club. Carlson contends these events made it clear that the business would not receive any additional cash flow. Carlson and Wilson closed Carwil in May 1996.
On June 2, 1997, a delegate of the Secretary of the Treasury made an assessment against Carlson and Wilson as responsible persons under I.R.C. § 6672, the trust fund recovery penalty, in the amount of $27,414.30 arising from Carwil's failure to pay federal withholding taxes through June 30, 1996. Carlson appeared before an IRS appeals officer for a Collection Due Process hearing on December 7, 2000. On April 24, 2001, the IRS issued a "Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330" summarizing its finding that Carlson was a responsible person for purposes of the collection and payment of trust funds. As of December 5, 2002, Carlson had paid $3306 to offset the penalty.
In paragraph 22 of the United States' Statement of Material Facts the government asserts that the amount of the assessment was $27,263.08. However, it cites in support an Affidavit in Support of Motion for Summary Judgment from the Internal Revenue Service which provides that the assessment totaled $27,414.30. Appendix at 112.
Carlson filed this action on May 24, 2001, and the government filed its counterclaim on January 9, 2002. Wilson filed a third-party counterclaim against the government on June 20, 2002, claiming he is not a proper party for an assessment under I.R.C. § 6672.
II. Summary Judgment Standard
Summary judgment is appropriate only when the record, viewed in the light most favorable to the nonmoving party, presents no genuine issues of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). At this stage of the proceedings, a court draws all factual inferences in favor of the nonmoving party and determines whether genuine issues of material fact exist that must be resolved by the finder of fact at trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252 (1986). A factual dispute is material if the fact "might affect the outcome of the suit under the governing law. . . ." Id. at 248. An issue of material fact is genuine if it is supported by evidence in the record. Hartnagel v. Norman, 953 F.2d 394, 395 (8th Cir. 1992).
III. Legal Analysis
Employers must withhold federal social security and income taxes from employees' wages. I.R.C. §§ 3102, 3402. Employers then hold the collected taxes in trust for the government. Id. § 7501. If an employer fails to pay the taxes to the government, the employees are nevertheless credited with payment. Slodov v. United States, 436 U.S. 238, 243 (1978). Under I.R.C. § 6672, a person responsible for collecting, accounting for, or paying over such taxes who willfully fails to remit those taxes to the government is liable for a penalty equal to the amount of the unpaid taxes. Olsen v. United States, 952 F.2d 236, 238 (8th Cir. 1991). "The responsible person has the burden to show that he did not willfully fail to pay over the federal employment taxes." Id. at 239.
A person is responsible for purposes of I.R.C. § 6672 if he has "the status, duty and authority to avoid [a] . . . default in [the] . . . payment of [employment] taxes." Kenagy v. United States, 942 F.2d 459, 464 (8th Cir. 1991). More than one person may be recognized as responsible under I.R.C. § 6672 SO long as that person has significant authority "in the area of corporate decision-making and matters related to federal tax payments." Id. A responsible person acts willfully for purposes of I.R.C. § 6672 in either of two ways. First, a person may "`act or fail to act consciously and voluntarily and with knowledge or intent that as a result of his action or inaction trust funds belonging to the government will not be paid over but will be used for other purposes.'" Olsen, 952 F.2d at 240 (quoting Hartman v. United States, 538 F.2d 1336, 1341 (8th Cir. 1976)). Second, a person's conduct is willful when he or she "proceed[s] with a `reckless disregard of a known or obvious risk that trust funds may not be remitted to the government.'" Honey v. United States, 963 F.2d 1083, 1087 (8th Cir.) (quoting Olsen, 952 F.2d at 240 (citation omitted)), cert. denied, 506 U.S. 1028 (1992).
Carlson concedes that he is a responsible person under I.R.C. § 6672. He nevertheless asserts that his failure to pay over withholding taxes was not willful because he made reasonable efforts to protect the taxes, but his efforts were frustrated by circumstances beyond his control. This is commonly referred to as the reasonable cause exception. Finley v. United States, 123 F.3d 1342, 1348 (10th Cir. 1997). The Eighth Circuit Court of Appals has on several occasions, however, considered and rejected the reasonable cause exception urged by Carlson. Keller v. United States, 46 F.3d 851, 855 (8th Cir.) ("[A]ttempts at establishing reasonable cause to excuse the failure to pay over withholding taxes do not negate a finding of willfulness."), cert. denied, 516 U.S. 824 (1995); Olsen, 952 F.2d at 241 ("This court has held that reasonable cause is no part of the definition of willfulness."); see also Finley, 123 F.3d at 1346 (citing cases from the First, Seventh, and Ninth Circuits rejecting exception). Moreover, when the time came to remit withholding taxes Carlson made the deliberate decision to pay creditors and employees rather than to protect the trust funds. Paying creditors instead of paying over withholding taxes with the knowledge that the taxes are due constitutes willfulness as a matter of law. Honey, 963 F.2d at 1087; Olsen, 952 F.2d at 240. Carlson acted willfully and is therefore, as a responsible person, liable under I.R.C. § 6672 for the trust fund penalty as a matter of law. The government's motion for summary judgment as to Carlson will be granted.
IV. Ruling and Orders
For the foregoing reasons, the defendant/counterclaimant's Motion for Summary Judgment is GRANTED with respect to plaintiff/counterclaim defendant James L. Carlson. IT IS ORDERED that judgment be entered in favor of the United States and against James L. Carlson in the amount of $24,108.30 ($27,414.30, the amount assessed, less $3306 in payments or refund offsets already made by Carlson), plus statutory interest accruing pursuant to law after the date of the assessment, June 2, 1997. IT IS FURTHER ORDERED that Carlson's complaint seeking the withdrawal and recision of the "Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330" be DISMISSED. IT IS FURTHER ORDERED that the government and Sidney Wilson file necessary papers to dispose of the now-settled claims between them.