Opinion
Case No.: 1-00-01864
March 10, 2003
For the Movant: Robert Glessner, Esquire.
For the Respondent: Beatrice Saiz, Esquire.
MEMORANDUM and ORDER
Procedural History
Before me is the objection of E. Harry Lartz (Debtor) to a proof of claim filed by the Internal Revenue Service (IRS) in the amount of $48,264.95. The claim was based on Debtor's alleged "responsible person" liability for unpaid trust fund taxes of the Dutch Club of York (DCY), where Debtor had served as President for a short time. Debtor objected to the claim, asserting that he did not have responsible person liability as defined by the Internal Revenue Code. A hearing was held and briefs have been filed. This matter is ripe for decision. This Court has jurisdiction pursuant to 28 U.S.C. § 157 and 1334. This matter is core pursuant to 28 U.S.C. § 157(b)(B).
Factual Findings
The DCY was a non-profit social club in York, Pennsylvania with an aging membership body. In 1989, it moved from its antiquated quarters to a more modern facility, but was unable to pay its new rent. When the DCY's president resigned from office, Debtor agreed to fill his position.
The DCY presidency was an unpaid position. Debtor was urged to serve by older club members who saw his youth as a potential magnet to attract younger members.
The DCY employed several full time staff members in paid positions to manage its affairs. It had a general manager, a bookkeeper/secretary and a catering manager.
Debtor did not sign payroll checks. The DCY had a contract with ADP, Inc. to administer its payroll. During Debtor's tenure as president, ADP used an outdated signature stamp bearing the name of Debtor's predecessor.
Debtor's term as president was short and tumultuous. Creditors called each day to seek payment. The club had to pay for all new purchases with cash. Decisions about whom to pay were made by many people — including the general manager, the bookkeeper, or any member of the Board of Directors who happened to be available for consultation at a given time.
At a specially scheduled Board meeting on March 7, 1990, a consultant hired by the Debtor informed the Board of the depth of the club's financial problems and failure to pay trust fund taxes. Debtor had not been aware of the tax problem prior to the meeting. Thereafter, Debtor instructed ADP to ensure that all trust fund taxes were paid.
On March 15, 1990, due to the club's failure to pay its taxes, Debtor formally tendered his resignation as president. The Board refused to accept his resignation, and so he agreed to continue to function under the title of "Acting President".
The DCY filed a Chapter 11 Petition in June, 1990.
The record contains no evidence that after March 7, 1990, the Debtor personally paid a creditor, other than the IRS, out of the DCY's funds.
Discussion
The provision of the Internal Revenue Code that pertains to the instant case, 26 U.S.C. § 6672(a), provides as follows:
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.
Under this provision, the financially "responsible persons" of a business entity who fail to ensure that payroll withholding taxes and social security taxes are paid are subject to a penalty in the amount of the taxes that were not paid. The assessment of such a penalty against an individual gives rise to a rebuttable presumption of correctness in favor of the government. Psaty v. United States, 442 F.2d 1154, 1160 (3d Cir. 1971); Hudson v. United States, 1999 WL 820453, at 3 (E.D.Pa.). To avoid § 6672 liability, the taxpayer bears the burden of coming forward and proving by a preponderance of the evidence that he is not a responsible person within meaning of the statute, or that he did not willfully fail to remit the trust fund taxes in issue to the IRS. Brounstein v. United States, 979 F.2d 952, 954 (3rd Cir. 1992); accord, United States v. Running, 7 F.3d 1293, 1297 (7th Cir. 1993); United States v. McCombs, 30 F.3d 310, 318 (2d Cir. 1994). The burden on the taxpayer is not altered because the issue arises in the context of a bankruptcy proceeding. Raleigh v. Illinois Department of Revenue, 530 U.S. 15, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000).
In the instant case, the Debtor bears the burden of proving either that he was not a responsible person within the meaning of the statute or that his actions were not "willful" as that term is defined by the law.
A responsible person under § 6672(a) is a person required to collect, truthfully account for or pay over any tax to the government. Quattrone Accountants, Inc. v. IRS, 895 F.2d 921, 927 (3rd Cir. 1990). Responsibility, in this context, is a matter of "status, duty, or authority, not knowledge." Id. Quattrone, 895 F.2d at 927. The Third Circuit recognizes the following factors as indicia of responsibility:
(1) contents of the corporate bylaws; (2) ability to sign checks on the company's bank account; (3) signature on the employer's federal quarterly and other tax returns; (4) payment of other creditors in lieu of the United States; (5) identity of officers, directors, and principal stockholders in the firm; (6) identity of individuals in charge of hiring and discharging employees; and (7) identity of individuals in charge of the firm's financial affairs.
In re Treacy, 255 B.R. 656, 663 (Bankr.E.D.Pa. 2000); citing, Greenberg v. United States, 46 F.3d 239, 243 (3d Cir. 1994). The question of control over finances must be answered in light of the totality of the circumstances; no single factor, or the absence thereof is determinative. Fiataruolo v. United States, 8 F.3d 930, 939 (2nd Cir. 1993). Greenberg applies to the instant case as follows. The bylaws of the DCY gave Debtor financial authority over the operation of the club, but the bylaws were frequently ignored. For instance, the president of the club was to authorize and co-sign checks, but Debtor rarely co-signed checks. As president, Debtor was an authorized signatory on the DCY's bank accounts, but a corporate president is not necessarily presumed to have direct, actual knowledge of the status of tax payments simply because he is president. See, In re Brady, 110 B.R. 16 (Bankr.D.Nev. 1990) (title "treasurer" may be sufficient to presume knowledge of finances but titles like "vice president" often signify duties far removed from finance), citing, Bauer v. United States, 543 F.2d 142 (9th Cir. 1976). Moreover, the payroll was issued by an independent contractor whose function was so far removed from the Debtor's control that it used the facsimile signature of Debtor's predecessor, not of the Debtor, on payroll checks.
Debtor was only one of several officers, employees and members of the club who sometimes authorized the payment of creditors. Debtor was the president of the club only for a short time in the waning days of the club's existence. Debtor delegated most hiring and firing decisions to the general manager. There is no evidence that Debtor signed DCY tax reports. In short, Debtor had only nominal financial authority in the club, and he was only marginally involved in day to day financial operations, especially payroll operations. While "on paper" Debtor may have been a responsible person, in the totality of the actual circumstances, his degree of "responsibility" over payment of bills and taxes was very limited.
Each responsible person can be held jointly and severally liable for the debt. 26 U.S.C. § 6672(d). There is no indication in the instant record that other officers of the DCY were cited by the IRS for responsible person liability.
For a responsible person to be held liable under § 6672, he must be found to have made a "willful" decision to prefer other creditors over the IRS. The Third Circuit has defined "willfulness" in this context as "a voluntary, conscious and intentional decision to prefer other creditors over the Government. A responsible person acts willfully when he pays other creditors in preference to the IRS knowing that taxes are due, or with reckless disregard for whether taxes have been paid." Greenberg, 46 F.3d at 244, citing, Brounstein, 979 F.2d at 955-56.
Debtor denies having authorized payments to other creditors on a date after March 7, 1990, when he first became aware of the non-payment of taxes. Debtor bears the burden of proving his denial. I find ample circumstantial support to sustain his burden. The DCY was not Debtor's full time business or even a source of income to him. He was not responsible for actual payment of taxes. A great number of people made daily decisions about what creditors to pay. Under such conditions, it is readily believable that Debtor himself did not authorize any payments to any other creditors after March 7, 1990.
While the IRS did produce an Insurance Premium Finance Agreement dated March 9, 1990 and signed by Debtor, there is no proof that Debtor wrote a check from DCY's account to make the down payment on the Agreement. Indeed, it appears quite possible that Debtor may have written a personal check, or obtained the down payment from another club member, since the club was so strapped for funds. The IRS had access to the DCY's bank records from which it could have produced checks signed by Debtor after March 7, 1990. There are no such checks of record. Without such evidence, I cannot equitably find that the IRS refuted Debtor's case.
Debtor himself loaned the club $2,000.00 on one occasion, and another member donated $10,000.00 to retain counsel to assess DCY's financial position.
Moreover, Debtor's testimony proved that, after March 7, 1990, he attempted to correct the lack of payment of trust fund taxes. The Court finds it credible that Debtor contacted ADP to instruct it to ensure that the taxes were paid. The IRS neither called witnesses from ADP to refute Debtor's testimony, nor impeached his credibility on the issue. Debtor's testimony finds circumstantial support in the fact that as an unpaid officer of a non-profit organization, he had nothing to gain by keeping the club afloat while putting himself at great risk of substantial tax liability. He had every motivation to contact ADP to correct the problem, and no motivation to fail to do so. The IRS does not assert that Debtor was required to take further steps to ensure that taxes were paid. In the absence of evidence that additional measures were required, the Court is not inclined to speculate about alternative actions Debtor could have undertaken.
In this context, it is notable that 26 U.S.C. § 6672(e) provides an exception for voluntary board members of tax-exempt organizations. In pertinent part, it provides that
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 capacity,
(2) does not participate in the day-to-day or financial operations of the organization, and
(3) does not have actual knowledge of the failure on which such penalty is imposed.
In short, the totality of the circumstances indicates that Debtor should not bear responsible person liability. His case may be compared to that of Holley v. United States, 89-1 USTC 87,375 (E.D. Wis. 1989), where a volunteer director of a social services program was relieved of liability under § 6672 due to "financial confusion and a lack of funds in the waning days of the agency." The tax court held that a finding of gross negligence in management of the organization was necessary for an imposition of responsible person liability.
See also, Hildebrand v. U.S., 563 F. Supp. 1259, 1260 (N.J. 1983) in which the Court made the following observations about responsible person liability for volunteers. "This matter portrays the government at its heartless, rigid, and Orwellian bureaucratic worst. The plaintiffs in this action were engaged in selfless, dedicated charitable activity. They gave of their time and themselves to assist those in need. They received no personal gain other than the satisfaction derived from their charitable endeavors. The compassionate federal government, and particularly the well-known, warmhearted Internal Revenue Service, has chosen to reward them with personal liability for the nonpayment of withholding taxes."
Similarly, in this case, the Debtor may be said to have been in the wrong position at the wrong time. He became president while the club was in a state of financial chaos in its waning days. If he was negligent at all, it can hardly be considered gross negligence.
ORDER
The objection of the Debtor to the IRS's claim based on responsible person liability is hereby SUSTAINED.