Opinion
No. A99-0622 CV (JDR)
December 17, 2001
ORDER
(UNITED STATES' MOTION FOR SUMMARY JUDGMENT)
The court has now before it in this complaint for redetermination of assessment of tax, a motion for summary judgment by the defendant, United States of America, Commissioner, Internal Revenue Service. (Docket No. 35). Said motion is opposed by the plaintiffs, Harry Hunison and Bud Vigue. (Docket No. 38; reply at No. 39). Oral argument has not been requested and is not deemed necessary. For the reasons that follow the motion for summary judgment shall be granted.
THE LEGAL STANDARD
Before addressing the instant motion, the court first sets forth the standard for granting a summary judgment motion. Rule 56(c) of the Federal Rules of Civil Procedure, provides in relevant part:
The judgment sought shall be rendered forthwith 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.
In deciding a motion for summary judgment the court views the evidence and the inferences therefrom in the light most favorable to the non-moving party. Levin v. Knight, 780 F.2d 786, 787 (9th Cir. 1986). Three United States Supreme Court cases have clarified what a non-moving party must do to withstand a summary judgment motion. As explained by the Ninth Circuit in Cal. Arch. Bldg. Prod. v. Franciscan Ceramics Inc., 818 F.2d 1466, 1468 (9th Cir. 1987):
First, the Court has made clear that if the non-moving party will bear the burden of proof as to an element essential to its case, and that party fails to make a showing sufficient to establish a genuine dispute of fact with respect to the existence of that element, then summary judgment is appropriate. See Celotex Corp v. Catrett, [ 477 U.S. 317] 106 S.Ct. 2548, 2552-53, 91 L.Ed. 265 (1986). Second, to withstand a motion for summary judgment, the non-moving party must show that there are "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. 242] 105 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986) (emphasis added). Finally, if the factual context makes the non-moving party's claim implausible, that party must come forward with more persuasive evidence than would otherwise be necessary to show that there is a genuine issue for trial. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 1356; 89 L.Ed.2d 538 (1986).
FACTS
In 1995, Hunison and Vigue formed a partnership. The partnership (Hunison and Vigue equally) owned the Cordova Hotel and Bar. On December 23, 1995, Delbert A. Wickham and Dorene Andersen (later Dorene Wickham after marriage to Delbert) began managing the day to day operations of the Cordova Hotel and Bar. It was understood that Wickhams intended to purchase the business from the partnership, and the Wickhams had an option to purchase the property for $350,000. On July 19, 1996, the partnership made application to transfer the liquor licenses to Wickhams. The transfer was completed to the Wickhams and the business was sold to the Wickhams on December 9, 1996.During the period between the Wickhams taking over the management of the day to day operations of the business and the sale of the business to them, Hunison and Vigue were authorized to sign checks at the partnership account in the name of the "Cordova Hotel and Bar". They had requested and received a Tax identification number. The Wickhams received paychecks and their W-2 forms reported wages paid to them. There was no lease or operating agreement, and the Wickhams' "management" and their role as agents of the business, did not result in Hunison or Vigue (the partnership) relinquishing ultimate authority for control of any aspect of the business. Rather, they were in charge of running the business with an option to purchase it.
After December 22, 1995, payroll checks drawn on the partnerships account were signed by the Wickhams instead of the previous manager of the business, Jack Loveless. A accounting firm by the name of Goodrich Company was responsible for: (1) performing the employee tax calculations necessary for the manager (the Wickhams) to issue the employees their checks for net wages each pay period; and, (2) preparing employment tax returns on behalf of the partnership, to be filed under the partnership's tax identification number. The hours were reported by Dorene Wickham or someone else at the Cordova Bar and Hotel. After the Wickhams closed on the purchase of the Cordova Bar and Hotel, the Goodrich Company prepared a quarterly employment tax return for the fourth quarter of 1996 ending as of the last day the partnership owned the business. The Goodrich Company billed the partnership for all of this work.
The sale of the Cordova Hotel and Bar property closed on December 9, 1996. The Wickhams received credit of a down payment of $25,000 and the partnership took a promissory note for $325,000 for the balance due. The Wickhams gave a deed of trust on the real property and a security interest in the liquor licenses.
After December 9, 1996, the Wickhams began making payroll to their employees through a new bank account at National Bank of Alaska.
Form 941 tax returns for the second, third and fourth quarters of 1996 and a form 940 unemployment tax return were filed by the partnership by Mr. Wickham. The form 941 returns were signed by Mr. Wickham as "Manager". The form 941 for the partnership for the fourth quarter of 1996, denominated "Final", ended as of the sale of the Cordova Hotel and Bar, December 9, 1996. Although the returns showed a zero balance due, the liabilities had not been timely paid in full. The total amount due is $16,670.38. The Internal Revenue Service assessed that amount and the plaintiffs filed for a hearing objecting to the Service's position that they were liable for the taxes. On November 5, 1999, the Appeals Division sustained the decision to collect the unpaid liabilities by levy. The plaintiffs then filed the complaint for redetermination of assessment of tax.
DISCUSSION
This is a case of deal making and ownership transition that has led to confusion on the part of the plaintiffs as to their responsibility to pay taxes until transfer of ownership was actually made. The matter is readily resolved as a matter of law. First, there is no dispute that under Section 3111 of the Federal Insurance Contribution Act (FICA) an employer is liable for an excise tax equal to a percentage of wages paid by it with respect to employment, that is, the employer's share of FICA. An employer is required to withhold the employee's share of FICA pursuant to I.R.C. § 3102(a). An employer also is subject to Federal Unemployment Tax Act (FUTA) tax based upon the amount of wages it pays. I.R.C. § 3301. An employer must also withhold income taxes from wages paid to each employee. I.R.C. § 3402(a) Employer is defined in I.R.C. § 3401(d) in relevant part as:
For purposes of this chapter, the term "employer" means the person for whom an individual performs or performed any service, of whatever nature, as the employee of such person, except that —
(1) if the person for whom the individual performs or performed the service does not have control of the payment of the wages for such services the "employer" * * * means the person having control of the payment of such wages.
It is undisputed that this definition was drafted for purposes of income tax withholding, but is equally applicable to FICA withholding and to FUTA. Otte v. United States, 419 U.S. 43, 51 (1974); Matter of Southwest Restaurant Systems, Inc., 607 F.2d 1237, 1238-1239 (9th Cir. 1979). The plaintiffs, however, add that "[N]o one other than the person who has control over the payment of wages is in a position to make the proper accounting and payments to the United States." Matter of Southwest Restaurant Systems, Inc. at 1240.
Notably, the defendant failed to provide a jump cite to Otte, and with regard to several cases they gave part of the formal case title of cases found at the beginning of cases instead of the appropriate title for citations found at the top of cases.
Thus is presented the central issue. During the time in question, did the plaintiffs have control over the payment of wages thereby making them the "employer"; or, was control over the payment of wages transferred to the Wickhams? In answer to this question, the United States offers the cases of Livingston v. U.S., 793 F. Supp. 251, 252-254 (D.Idaho 1992) and Baily v. United States, 355 F. Supp. 325, 328-330 (E.D.Penn. 1973). There, the courts held that the partnerships were common law employers and the partners were individually liable for the tax liabilities of the partnerships.
In the instant case, the plaintiffs submit that the "better case is" Kittlaus v. U.S., 41 F.3d 327 (7th Cir. 1994). In Kittlaus a partnership (Inn Investors) formally entered into a written management agreement with Hospitality Consultants of Oklahoma Inc. (HCI) to manage a hotel. The management agreement expressly precluded Inn Investors from involvement in the day-to-day operation of the hotel. Id. at 328. The Seventh Circuit held against the United States and in favor of Inn Investors finding:
We disagree with the government. The partnership had very limited access to the funds used to pay employees, which were largely generated from motel revenues. The management agent had authority to pay all costs and expenditures, including employee compensation and their own management fee, out of these accounts. The partnership could request disbursement to them only of amounts exceeding working capital; the plaintiff had no signature authority over the accounts.
Regardless of how "control" is defined, it is clear that the management agent, not the partnership, possessed it over the payment of wages. The exception laid out in § 3401(d)(1) thus governs, and the only logical conclusion is that the management agent, rather than Inn Investors was the liable employer. See Matter of Southwest Restaurant Systems Inc., 607 F.2d 1237, 1240 (9th Cir. 1979). (holding that "[n]o one other than the person who has control of the payment of the wages is in a position to make the proper accounting and payment to the United States").Id. at 329-330.
Ironically, Kittlaus cuts against the plaintiffs in the case at bar. Here there was no agreement that the plaintiffs were prohibited from being involved in the day-to-day operations of the Cordova Hotel and Bar. Furthermore, they maintained full signatory authority over the bank accounts. The fact that they delegated that authority to the Wickhams and called the Wickhams "managers" did not change the legal status of the parties. Until title to the liquor licenses and the Cordova Bar and Hotel changed hands the plaintiffs/partnership were the ones with ultimate control over payment of the wages and taxes in question, and the Wickhams were their employees. Therefore, it matters not that, as the plaintiffs argue, there is no evidence that the plaintiffs ever returned to Cordova to operate the business, and the Wickhams operated and controlled the business exclusively. Finally, the United States articulated the bottom line in this case quite accurately when in its reply brief it states that: "Legal control is sufficient, regardless of whether it is exercised in fact." This is consonant with Kittlaus. To hold otherwise would invite an infinite variety of misunderstandings, and (although not the case here) schemes for turning the responsibility for the payment of taxes into a proverbial "shell-game". The United States is entitled to judgment as a matter of law.
CONCLUSION
For the foregoing reasons the United States' motion for summary judgment (Docket No. 35) is hereby GRANTED.