Opinion
Civil Action No. 3:99-CV-0831-D
May 4, 2001
MEMORANDUM OPINION AND ORDER
The court must decide in this case whether the plaintiff-counterdefendant is a "responsible person" who willfully failed to pay to the Internal Revenue Service ("IRS") employment taxes withheld by her corporate employer. The court must also resolve whether the IRS assessment is invalid because it lists an incorrect social security number for the plaintiff-counterdefendant.
I
This case arises from the failure of Pinpoint Communications, Inc. ("Pinpoint") to pay employment taxes to the IRS for the third and fourth quarters of 1995. Pinpoint sought to develop and market a fleet management system that would allow fleet operators, such as cab company dispatchers, to locate and communicate with individual members of the fleet. Patrick G. Bromley ("Bromley") ran Pinpoint as its Chief Executive Officer and Chairman of the Board. He was also Pinpoint's largest stockholder. Bromley exercised final decisionmaking authority over the business, including the approval of certain expenditures and the power to hire and fire employees.
Pinpoint struggled to achieve its goal of profitability. In the second half of 1995, it failed to pay its federal payroll taxes in full. Eventually, it was no longer able to cover operating expenses, and filed for chapter 11 bankruptcy protection on February 1, 1996. It reserved the last of its funds to pay a bankruptcy attorney, relying on a personal check from a board member to satisfy the full fee. In August 1996 Pinpoint's chapter 11 reorganization was converted to a chapter 7 liquidation and the United States Trustee auctioned off all of Pinpoint's assets. At no point did Pinpoint pay the overdue payroll taxes for the third and fourth quarters of 1995.
The IRS, acting pursuant to 26 U.S.C. § 6672, assessed plaintiff-counterdefendant Beverly Frey ("Frey") the sum of $284,870.31 on February 18, 1999, seeking to hold her liable by statute as a "responsible person" who had willfully failed to pay over the withheld employment taxes to the IRS. Frey was Pinpoint's Secretary, Treasurer, and Controller, and the head of its Accounting Department. She was also a minor Pinpoint shareholder. Frey paid $100 of the assessment and then sued defendant-counterplaintiff United States of America ("the government") to recover that sum plus statutory interest. The government counterclaimed to recover $284,770.31 — the unpaid part of the assessment — plus interest and all statutory additions provided by law. The government also filed a third-party complaint against Bromley, but later reached a settlement with him and dismissed the third-party action. Only the claims between the government and Frey remain to be litigated. The government now moves for summary judgment, arguing that Frey is a "responsible person" under § 6672 who acted willfully in failing to pay the payroll taxes. It seeks dismissal of her claim and recovery on its counterclaim.
The court has not considered for any purpose the government's reply appendix filed February 8, 2001 because it is impermissible under either the pre-1998 or the present summary judgment rules. See Tovar v. United States, 2000 WL 425170, at *4 n. 8 (N.D. Tex. Apr. 18) (Fitzwater, J.), aff'd, 244 F.3d 135 (5th Cir. Dec. 12, 2000) (table) (per curiam).
II
The relevant law regarding liability under § 6672 for unpaid employment taxes is familiar and need not be recounted at length. Federal law requires that employers withhold from their employees' paychecks their shares of federal social security taxes and income taxes. See Barnett v. IRS, 988 F.2d 1449, 1453 (5th Cir. 1993) (citing 26 U.S.C. § 3102 and 3402). The employer holds the withheld taxes "in trust" for the United States and must pay them over to the government. Id; Wood v. United States, 808 F.2d 411, 414 (5th Cir. 1987). If an employer withholds the taxes from its employees but fails to remit them, the government must nevertheless credit the employees for having paid the taxes and seek the unpaid funds from the employer. Section 6672(a) imposes liability for these delinquent taxes not only on the corporate employer but on any person, including a corporate officer or employee, who is required to collect, truthfully account for, or pay over any tax-commonly referred to as "responsible persons" — who willfully fails to do so. See Barnett, 988 F.2d at 1453. This penalty is "separate and distinct from the liability imposed on the employer to remit the trust fund taxes." Stallard v. United States, 12 F.3d 489, 493 (5th Cir. 1994) (per curiam) (footnote omitted). Section 6672 provides the government recourse for collection of the taxes by allowing it to reach the persons responsible for causing the company's failure to pay the taxes. See Newsome v. United States, 431 F.2d 742, 745 (5th Cir. 1970) (citations omitted).To establish liability against Frey, the government must demonstrate that (1) she is a responsible person (2) who willfully failed to pay over the taxes. Barnett, 988 F.2d at 1453. Once the government offers a § 6672 assessment into evidence, the taxpayer bears the burden of disproving her responsible person status or willfulness. Id. Frey, as the plaintiff who seeks a refund of a partial payment of a § 6672 penalty, has the burden of proving that she is not a responsible person, even where, as here, the government has counterclaimed for the remainder of the tax. Morgan v. United States, 937 F.2d 281, 285 (5th Cir. 1991) (per curiam) (adopting opinion of Fitzwater, J.) (citing Liddon v. United States, 448 F.2d 509, 513-14 (5th Cir. 1971)).
III
Frey first contends the original assessment against her is invalid because it lists an incorrect social security number and that the IRS failed to make a correct assessment via Form 4340 before the statute of limitations expired. She maintains that the assessment against her is invalid and that the court does not have jurisdiction over this case.
Frey does not cite any authority for the proposition that the operation of a limitations bar deprives this court of jurisdiction, nor does she elaborate on this assertion elsewhere in her brief or explain how, if the court lacks jurisdiction, it has the power to grant her the relief she seeks in her suit against the government.
Before the penalty may be imposed, the government must properly notify the responsible party about the assessment. Stallard, 12 F.3d at 493. Pursuant to Treasury Regulation § 301.6203-1 — the regulation governing assessments — the summary record of the assessment must include the identity of the taxpayer, the character of the liability assessed, the taxable period, if applicable, and the amount of the assessment. "If the summary record is properly supported through a Form 4340, the assessment contained in that summary record is considered presumptively valid[.]" Id. Although the social security number listed on the original assessment actually belongs to a "Beverly Frey" from Houston, Texas, it is not the correct number for the Frey who is the plaintiff-counterdefendant in the present case.
Frey argues that by the time the IRS corrected this error and submitted a Form 4340 with the proper social security number, the statute of limitations had expired, thereby rendering the assessment invalid. In support of her argument, Frey cites Stallard, in particular the Fifth Circuit's characterization of the district court's holding in that case. Stallard does not support her position. In Stallard the Fifth Circuit held that the district court had incorrectly interpreted Brafman v. United States, 384 F.2d 863, 865 (5th Cir. 1967), to require that all provisions of Treasury Regulation § 301.6203-1 must be met within the limitations period. Stallard, 12 F.3d at 493. Correcting this misinterpretation, the Fifth Circuit emphasized that it is the date of the assessment itself, not of the supporting record, that is relevant for resolving statute of limitations issues. Id.
Because the date of the Form 4340 does not render the original assessment untimely in the instant case, the court must now decide whether the erroneous social security number invalidates the assessment. Frey cites no authority to support her contention that it does. In fact, Treasury Regulations require only that "[t]he summary record, through supporting records, shall provide identification of the taxpayer[.]" Treas. Reg. § 301.6203-1. Frey was identified by name and does not contend that she failed to understand the nature of the penalty. The Fifth Circuit has held that "a notice of assessment and demand for payment that contains a technical error will be held valid where the taxpayer has not been misled by the error." Sage v. United States, 908 F.2d 18, 22 (5th Cir. 1990) (citing Allan v. United States, 386 F. Supp. 499 (N.D. Tex. 1975) (Porter, J.) (holding that wrong name of company did not invalidate assessment)). Absent proof that would permit a reasonable trier of fact to find that Frey was misled by the misinformation contained in the original assessment, the court declines to hold that it is invalid on this basis.
IV
Because the government has introduced the assessment in evidence, the burden has shifted to Frey to prove either that she is not a "responsible person" or that she did not act willfully. At the summary judgment stage, she need only adduce evidence that creates a genuine issue of material fact.A
The Fifth Circuit "takes a broad view of who is a responsible person under § 6672." Logal v. United States, 195 F.3d 229, 232 (5th Cir. 1999) (citing Barnett, 988 F.2d at 1454). "In a great number of cases, [the Fifth Circuit] has held that a party was a `responsible person.'" Barnett, 988 F.2d at 1454 n. 10 (collecting cases). Whether Frey is a responsible person "turns on [her] status, duty, and authority." Turnbull v. United States, 929 F.2d 173, 178 (5th Cir. 1991). "The crucial inquiry is whether the individual had the effective power to pay the taxes." Id. (citing Howard v. United States, 711 F.2d 729, 734 (5th Cir. 1983)). This inquiry asks whether she "had the actual authority or ability, in view of [her] status within the corporation, to pay the taxes owed." Barnett, 988 F.2d 1454. The court looks to six nonexclusive factors to determine responsibility pursuant to § 6672, considering whether the person (i) is an officer or member of the board of directors; (ii) owns a substantial amount of stock in the company; (iii) manages the day-to-day operations of the business; (iv) has the authority to hire or fire employees; (v) makes decisions as to the disbursement of funds and payment of creditors; and (vi) possesses the authority to sign company checks. Logal, 195 F.3d at 232 (quoting Barnett, 988 F.2d at 1455). "No single factor is dispositive." Barnett, 988 F.2d at 1455.
B
The government contends that it has introduced in support of its motion evidence that precludes Frey from creating a genuine fact issue concerning whether she is a "responsible person." The court agrees.1
Frey testified that she was the head of Pinpoint's Accounting Department, became the company Controller in 1993, and held the offices of Secretary and Treasurer by mid-1994. As a result of her responsibilities, Frey had an intimate knowledge of Pinpoint's financial situation. She admitted that she handled Pinpoint's day-to-day accounting functions. Frey also acknowledged that she dealt with the company's outside independent auditors and was a member of the Pinpoint management team. She was authorized to provide the sole signature on checks for up to $10,000 and was the person who usually signed employee payroll checks. Frey was a Pinpoint stockholder and prepared financial statements and made financial reports to the Board of Directors at least quarterly. Before Pinpoint's affiliation with Price Waterhouse, Frey was responsible for generating the internal financial reports. She was but one of a handful of employees who had access to computerized company records, including the general ledger and the accounts payable. Frey was familiar with Pinpoint's bank accounts and, as one of two trustees of Pinpoint's 401(k) plan, was a defendant in a Department of Labor action for Pinpoint's failure to pay over 401(k) contributions. She also participated heavily in generating financial projections regarding when Pinpoint would become profitable.
2
Frey attempts in her summary judgment response to avoid "responsible person" liability by characterizing Bromley — the Pinpoint CEO and Board Chairman — as the person who had authority to pay the taxes, and by minimizing her own power. She contends that despite her titles and formal authority, Bromley's overwhelming control of the daily operations at Pinpoint prevented her from exercising the necessary practical authority to be considered a responsible person under § 6672. Her arguments are unavailing, however, and her evidence fails to raise a genuine issue of material fact that requires a trial.Frey argues that her status as the company's Secretary, Treasurer, and Controller was merely titular and that Bromley made all significant decisions regarding finances. She asserts that she constantly acted only under Bromley's direction and had no power to act without his approval. Furthermore, in an attempt to illustrate their relative interest in and control over Pinpoint, she compares her stock ownership — 0.13% — to Bromley's outlay of approximately $4.5 million. The fact that Bromley exercised more influence and control over the operations of Pinpoint does not mean that Frey was not also a responsible person. The Fifth Circuit has recognized that "[t]here may be — indeed, there usually are — multiple responsible persons in any company." Barnett, 988 F.2d at 1455. Section 6672 "applies to all responsible persons, not just to the most responsible person." Gustin v. United States, 876 F.2d 485, 491 (5th Cir. 1989). A host of persons have been held liable as responsible persons even though they did not exercise final decisionmaking authority over all the operations of the company. See Howard, 711 F.2d at 734 (citing cases in which persons have been held to be "responsible," despite existence of another person with more significant control over company decisions). The focus, therefore, is not upon whether Bromley exercised more authority than did Frey, but upon whether Frey had the status, duty, and authority that gave her effective power to pay Pinpoint's delinquent payroll taxes.
Concerning her control over Pinpoint's operations, Frey contends that she had neither effective power to pay taxes nor significant authority in the general management and financial decisionmaking of the corporation. In particular, she focuses on her limited authority to make employment decisions. She asserts that outside the Accounting Department, she lacked the authority to hire and fire employees and to participate in these decisions. She points out that although she had the authority to participate in Accounting Department hiring decisions, the persons hired for these positions had to be approved by others, and that she was involved in the hiring of only two employees. This evidence does not create a genuine issue of material fact on whether she was a responsible person. See Gustin, 876 F.2d at 492 (holding that party was responsible person despite limited authority to hire employees). Her inability to make final employment decisions outside the Accounting Department did not prevent her from exercising sufficient power within that department to ensure that Pinpoint paid its taxes. Moreover, authority to make employment decisions within the Accounting Department, even if not unilateral, would only permit a reasonable trier of fact to find that she did exercise significant control over Pinpoint's operations.
Frey relies on the Federal Circuit's reasoning in Godfrey v. United States, 748 F.2d 1568, 1575 (Fed. Cir. 1984), to argue that she did not participate in day-to-day management of the company. In Godfrey the Federal Circuit compared the limited authority of the petitioner in that case to that of the taxpayer in White v. United States, 372 F.2d 513, 514-15 (Ct.Cl. 1967) (per curiam), in which responsible person status was found. Godfrey's reasoning, therefore, is not, as Frey contends, a definition of day-to-day management. Rather, it is a description of the duties of one particular person who was found to be a responsible person in a case that is not binding authority on this court. The court declines to adopt this description as a definition of day-to-day management when the Fifth Circuit has provided sufficient guidance on this issue.
Frey contends that even if she did possess some degree of control over the operations of Pinpoint, her authority did not extend to the financial operations of the company. She maintains that she did not have the effective authority to pay the taxes because that power rested exclusively with Bromley. She argues that Bromley, not she, was the person with authority to direct the payment of creditors. The focus under § 6672, however, is not on who is the most responsible person, but whether the person in question had the effective power to pay the taxes. Even if she was not the "one with ultimate authority over expenditures of funds," P. Br. 19, a reasonable trier of fact could only find that she was intimately involved in Pinpoint's financial operations. She handled the day-to-day accounting functions, dealt with outside auditors, had access to financial records, and generated financial reports for the Board of Directors. Bromley's relatively greater control does not create a fact issue as to whether Frey had sufficient authority over the financial operations of the company to pay the delinquent taxes.
Moreover, Frey does not dispute that she possessed the power to provide the sole signature on checks under $10,000 and usually signed employees' paychecks. She attempts to draw a distinction, however, between the right to sign a check and the requirement that, before she did so, she obtain someone else's approval. Frey maintains that Bromley's authorization was necessary before she could sign a check. She also relies on the fact that Pinpoint policy prohibited her from engaging in "piecemealing," i.e., dividing what was in fact a single expenditure into two or more disbursements to circumvent limits on expense authority. She reasons that because two signatures were required on a check that exceeded $10,000, and in view of the "piecemealing" policy and Bromley's tight control of Pinpoint's finances, she would have been required to obtain a cosigner's signature to make a tax payment in full to the IRS.
The fact that Frey's check writing authority was circumscribed by company policy and Bromley's extensive powers over Pinpoint operations does not create a material fact issue because persons with even limited check writing authority have been held to be responsible persons. See Gustin, 876 F.2d at 492. Frey has submitted no evidence that she attempted to use her check writing authority to pay the taxes. See id (noting that responsible person who only had authority to provide sole signature on checks under $2,500 never showed that he had requested and was denied authority to pay the tax bill). Finally, she cannot escape responsible person status by claiming that Bromley explicitly directed her not to pay the taxes and to pay other creditors instead. Although the difficulty of her situation is indubitable, the Fifth Circuit has affirmed liability despite the fact that an individual would have been terminated had she paid the payroll taxes. See Howard, 711 F.2d at 734-35.
The evidence adduced by the government establishes that Frey's status and duties, and her authority over financial matters and access to company funds, provided her with the effective power to pay Pinpoint's delinquent payroll taxes. In her response, she has failed to introduce evidence that would permit a reasonable trier of fact to find that she was not a responsible person under § 6672. The government is therefore entitled to summary judgment on this issue.
V
If an individual is a "responsible person" under § 6672, then to avoid liability she must prove that she did not act willfully. See Morgan, 937 F.2d at 286 ("The responsible person bears the burden of proving h[er] actions were not willful.").
A
"[T]he willfulness inquiry is the sifter in most § 6672 cases." Barnett, 988 F.2d at 1457. "Willfulness under § 6672 requires only a voluntary, conscious, and intentional act, not a bad motive or evil intent." Id; Morgan, 937 F.2d at 285. "A responsible person acts willfully if [s]he knows the taxes are due but uses corporate funds to pay other creditors, or if [s]he recklessly disregards the risk that the taxes may not be remitted to the government." Logal, 195 F.3d at 232 (citations omitted). Moreover, "[a] responsible person who learns of the underpayment of taxes must use later — acquired unencumbered funds to pay the taxes; failure to do so constitutes willfulness." Id "Willfulness is normally proved by evidence that the responsible person paid other creditors with knowledge that withholding taxes were due at the time to the United States." Barnett, 988 F.2d at 1457. "A considered decision not to fulfill one's obligation to pay the taxes owed, evidenced by payments made to other creditors in the knowledge that the taxes are due, is all that is required to establish willfulness." Howard, 711 F.2d at 736.
B
The government has submitted evidence that Frey knew of the unpaid payroll taxes from the time they first went unpaid and knew that Pinpoint never paid them. Frey does not dispute that in 1995 she was intimately aware of Pinpoint's financial difficulties and its failure to pay the taxes. In particular, she does not deny that she knew that Pinpoint had not met the September 30, 1995 payroll, the October 1, 1995 rent, and overdue employment taxes. When Frey informed Bromley in October that funds were insufficient to make these payments, he directed her not to pay the taxes. Pinpoint eventually received more funding later that month. Bromley and Frey then discussed the most urgent debts, including the employment taxes, and the decision was made to pay the October 15 payroll in full, including payroll taxes. On October 31, November 15, and November 30, employees received half pay and the applicable taxes were remitted to the IRS. Pinpoint did not, however, pay the overdue employment taxes. Throughout this period, during which other debts were satisfied and Frey herself even received a paycheck, she remained aware that Pinpoint had not repaid overdue payroll taxes.
Frey argues that she did not act willfully because Bromley exercised overwhelming control over company funds. She suggests that Bromley's direction not to pay the overdue taxes precludes a finding that she acted willfully. These arguments would not permit a reasonable trier of fact to find in Frey's favor. The Fifth Circuit has explicitly held that a responsible person who knows of her employer's delinquent payroll taxes acts willfully regardless of her superior's instruction not to pay the taxes. See Howard, 7 11 F.2d at 735-36. A reasonable trier of fact could only find that Frey knew of the tax deficiencies and Pinpoint's persistence in satisfying other debts before paying the delinquent taxes, and thus find that Frey acted willfully.
Once Frey "became aware of the tax liability, [she] had a duty to ensure that the taxes were paid before any payments were made to other creditors." Barnett, 988 F.2d at 1457 (citing Mazo v. United States, 591 F.2d 1151, 1154 (5th Cir. 1979)). The government's undisputed evidence that she failed to do so establishes willfulness as a matter of law. Id (citing Howard, 711 F.2d at 735; Mazo, 591 F.2d at 1157). Neither Bromley's relative degree of control over Pinpoint nor his direction not to pay the taxes raises a genuine issue of material fact about Frey's knowledge of the delinquent taxes. Accordingly, the government is entitled to summary judgment.
* * *
The government's motion for summary judgment is granted. It is entitled to dismissal of Frey's action against it and to recover from Frey the sum of $284,770.31, plus interest and all statutory additions provided by law. The government has settled with Bromley and indicates that it will credit Frey for any payments that Bromley has made. Accordingly, the judgment that the court files today is entered with the explicit proviso that Frey is entitled to a credit against the judgment for any payment that Bromley has made to the government.