Opinion
Case No. 1:99CV2102
February 12, 2002
MEMORANDUM OF OPINION
This matter is before the court on consent of the parties. Pending is the Motion for Summary Judgment filed by the defendant, United States of America. For the reasons set forth below, the motion is granted.
I.
Willard Bell ("Bell"), deceased husband of plaintiff executrix Roxanne Bell, served as president and majority shareholder of Dyac Corporation ("Dyac"). Beginning in July 1990 Bell, on behalf of Dyac, began a series of loan transactions with Bank One. Initially the transactions took the form of a Credit and Security Agreement with a series of Amendments to the Agreement being necessitated by the company's inability to pay loan balances.
In January 1992 Dyac and Bank One entered into a Forbearance Agreement in order to allow the company to continue to operate. January — March 1992 is the critical time period for purposes of this action and thus will be focus of the court's discussion. During these months Bank One held a security interest in all of Dyac's assets, including its accounts receivable. In order to maintain control over the accounts receivable, and to use tern as a set off to advances under a revolving credit agreement the funds were forwarded directly to a "lockbox" at the bank. Under the terms of the Forbearance Agreement Dyac delivered to the bank certain financial information and a proposed Budget of expenditures covering weeks ending January 25 and February 1, 1992. Forbearance Agreement, Recitals, ¶ H. The Forbearance Agreement provided that the first loan in any cycle "shall be set aside and reserved for the payment of that week's projected payroll and `trust fund' taxes:"
The Borrower agrees that the first Revolving Loans available to it hereunder as of the date hereof . . . and there after as maybe necessary . . . shall be set aside and reserved for the payment of that week's projected payroll and "trust fund" payroll taxes, as the same are set forth on the Budget; and the Borrower hereby instructs the Bank, without further instruction or request from the Borrower, to advance such Revolving Loans as deposits into the Borrower's payroll account maintained at the Bank and hereby further agrees that such sums shall be drawn upon solely for such purposes.
"Trust fund taxes" are those which "any person is required to collect or withhold . . . from any other person and to pay over . . . to the United States . . . ." 26 U.S.C. § 7501(a). Such taxes are said to be held "in trust" for the United States. These include income and FICA taxes.
Forbearance Agreement at ¶ 2. By memo dated January 22, 1992 Gary Sprague, Managed Assets personnel at Bank One, noted that the Bank would advance $16,5000 on February 3, 1992 for payroll only, "(the hourly payroll and trust fund taxes for prior week) . . . ." Government Ex. 5. Sprague further noted, as a control, "[s]equestering of payroll and trust fund taxes on a weekly basis from the first funds available so that they don't hold us up for payroll at week end."
Dyac had to follow a specific procedure to request loan advances. It was required to submit to Bank One a "borrowing certificate;" the amount requested would include anticipated operating expenses, payroll and payroll taxes. Sprague depo. at 37. As stated above, under the Forbearance Agreement Dyac agreed to having the initial funds that were to be distributed weekly used for payroll and trust fund taxes. Id. at 39. The court notes that the borrowing certificate transmitted on February 14, 1992 to Sprague from Bell (certificate 078) includes a payroll request as well as a FICA amount Government Ex. 20.
Sprague testified that once funds were advanced Dyac made all decisions regard what bills to pay. Bank one did not make the decision in any circumstances.
According to a sworn statement submitted on behalf of Bell, the Bank did not authorize payment of trust fund taxes. On February 12, 1992 Bell transmitted to the Bank a fax indicating past trust fund obligations "which the Company has not been able to obtain the release of our funds from the Bank to be able to discharge." Small testified that he saw Bell submit requests which included requests for payroll taxes. Small depo. at 43. While Small did not know whether the payroll taxes were being paid from the advances, he assumed they were. Id. at 44.
The statement executed by Bell at some point prior to his death, is not a formal affidavit in form and is not notarized. Thomas Small, vice president of Dyac, by separate statement affirms the veracity of Bell's statement.
It is Bell's position that the Bank defaulted in its obligation to approve and advance trust fund taxes. Because the Bank would release funds only for specific payees and those payees did not include the Government, Bell argues, he had no control over the distribution of funds and cannot be held liable for failing to make the trust fund tax payments.
II.
Summary judgment is appropriate only when there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986); Matsushita Elec. Indies. Co. v. Zenith Radio Corp, 475 U.S. 574 (1986). The moving party must demonstrate to the court through reference to pleadings and discovery responses the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. at 323. In this way summary judgment can be used to dispose of claims and defenses which are factually unsupported. Id. at 324. The burden on the nonmoving party is to show, through the use of evidentiary materials, the existence of a material fact which must be tried. Id. The court's inquiry at the summary judgment stage is "the threshold inquiry of determining whether there is the need for a trial — whether, in other words, there are any genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Anderson v. Liberty Lobby Inc., 477 U.S. at 250. The court's treatment of facts and inferences in a light favorable to the nonmoving party does not relieve that party of its obligation "to go beyond the pleadings" to oppose an otherwise properly supported motion for summary judgment under Rule 56(e). See Celotex Corp. v. Catrett, 477 U.S. at 324. The nonmoving party must oppose a proper summary judgment motion "by any of the kinds of evidentiary material listed in Rule 56(c), except the mere pleadings themselves . . . ." Id. Conclusory allegations of an affidavit do not create specific fact disputes for summary judgment purposes. Lujan v. National Wildlife Fed'n, 497 U.S. 871, 888-89 (1990). A scintilla of evidence in favor of the nonmoving party is not sufficient the issue which the court must determine is whether there is evidence on which a jury could reasonably find for the nonmoving party. Street v. J.C. Bradford Co., 886 F.2d 1472, 1477 (6th Cir. 1989).
III.
Sixth Circuit law is well summarized in Collins v. United States, 848 F.2d 740, 741-42 (6th Cir. 1988):
Under 26 U.S.C. § 6672(a), a person is personally liable for unpaid taxes withheld from the earnings of employees if he is an officer or an employee of a corporation who is under a duty to collect and pay over the taxes to the government, and willfully fails to do so. Taxes withheld from the wages of an employee are held by the employer in trust for the government. 26 U.S.C. § 7501(a). 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. Gephart v. United States, 818 F.2d 469, 472 (6th Cir. 1987). 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. See Thibodeau v. United States, 828 F.2d 1499, 1506 (11th Cir. 1987).
The clear intent of Congress, as expressed in 26 U.S.C. § 6672(a), was that the person responsible for paying these trust fund taxes over to the government should be personally liable for their diversion. Spivak v. United States, 370 F.2d 612, 615 (24 Cir.), cert. denied, 387 U.S. 908, 87 S.Ct. 1690, 18 L.Ed.2d 625 (1964 The assessment, although collectible in the same manner as other taxes, is expressed as a "penalty" against the responsible person for his failure to carry out the duties imposed upon him by the statute. See 26 U.S.C. § 6672(a). Despite its denomination as a "penalty" assessment, the statutory liability imposed by 26 U.S.C. § 6672(a) is civil in nature. Gephart, 818 F.2d at 473. When a person who pays part of a penalty assessed against him under 26 U.S.C. § 6672(a) for failure to pay over withheld taxes, files suit for refund of the portion paid, and the government counterclaims for the balance of the assessment, the person has the burden of showing that the assessment is inaccurate or erroneous. This is because he has placed at issue an assessment which is presumed correct See Avco Delta Corp. v. United States, 540 F.2d 258, 262 (7th Cir. 1976), cert. denied sub nom. Canadian Parkhill Pipe Stringing Ltd, 429 U.S. 1040, 97 S.Ct. 739, 50 L.Ed.2d 752 (1977). His burden includes proving, by a preponderance of the evidence, that he was not a responsible person who willfully failed to pay over the withheld taxes. Calderone v. United States, 799 F.2d 254, 258 (6th Cir. 1986); Sinder v. United States, 655 F.2d 729, 731 (6th Cir. 1981).
Plaintiff does not dispute that Bell was a responsible party. Nor does there appear to be any question that Bell knew of the obligation to pay the taxes. The sole issue is whether Bell's failure to pay the trust fund taxes was willful.
The Sixth Circuit standard for a finding of willfulness is far different from that of the Tenth Circuit, the court upon which plaintiffs rely. "Willfulness is present if the responsible person had knowledge of the tax delinquency and knowingly failed to rectify it when there were available funds to pay the government." Gephart v. United States, 818 F.2d 469, 475 (6th Cir. 1987). As in Gephart, Bell himself used money loaned by Bank One to pay creditors instead of paying trust fund taxes. He was in the primary role of corporate executive and decision-maker at Dyac. He expressed concern to Bank One that the trust fund taxes were not being paid. Thus clearly he knew that other creditors were being paid before the trust fund taxes and yet continued to pay those other creditors. Sixth Circuit law does not allow a responsible person to make this decision.
Plaintiffs argue that there was "reasonable cause" for failure to pay trust fund taxes. First, as stated in Brewery, Inc. v. United States, 33 F.2d 589, 593 (6th Cir.), "[s]ection 6672(a) does not have a reasonable cause exception." Second, in Collins, 848 F.2d at 741-42, the court repeated the message of Thibodeau, 828 F.2d at 1506, that "government cannot be made an unwilling partner in a floundering business." Thus even if the "reasonable cause" defense were viable, it would not apply to a situation such as this one where trust fund taxes were accorded second place status to bills needed to keep Dyac operating. "[P]roof that a responsible person had knowledge of payments to other creditors, including employees, after he was aware of the failure to pay over withholding taxes is proof of willfulness as a matter of law." Luce v. Luce, 119 F. Supp.2d 779, 785 (S.D. Ohio 2000). If in Brewery Inc. the court concluded that the need to pay suppliers to keep a business operating was not reasonable cause to excuse nonpayment of withholding taxes, certainly in this case, where § 6672(a) applies and reasonable cause is not a defense, payment of funds to keep Dyac operating with knowledge that trust fund taxes were not being paid cannot excuse Bell's actions.
IV.
For the above stated reasons the Motion for Summary judgment filed by the United States is granted.