Barton v. U.S., 92-1956

• Decision Date: 11 March 1993
• Docket Number: No. 92-1956,92-1956
• Citation: 988 F.2d 58
• Parties: -1123, 93-1 USTC P 50,144, Unempl.Ins.Rep. (CCH) P 17199A John R. BARTON, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee, Ray B. McMartin, Defendant. UNITED STATES of America, Counter-Claimant-Appellee, v. John R. BARTON, Counter-Defendant-Appellant.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 58

988 F.2d 58

71 A.F.T.R.2d 93-1123, 93-1 USTC P 50,144,

Unempl.Ins.Rep. (CCH) P 17199A

John R. BARTON, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee, Ray B. McMartin, Defendant.

UNITED STATES of America, Counter-Claimant-Appellee, v. John R. BARTON, Counter-Defendant-Appellant.

No. 92-1956.

United States Court of Appeals Eighth Circuit.

Submitted Nov. 10, 1992.

Decided March 11, 1993.

James R. Brown, Omaha, NE, argued (James W.R. Brown and William C. Brown, on brief), for plaintiff-appellant.

Sally Schornstheimer, Washington, DC, argued (James A. Bruton, Gary R. Allen and Kenneth L. Greene, on brief), for defendant-appellee.

Before FAGG, BEAM, and HANSEN, Circuit Judges.

FAGG, Circuit Judge.

McMartin Industries, Inc. failed to pay over to the government federal income and social security taxes withheld from employees' wages for parts of 1984 and 1985. The Internal Revenue Service (IRS) assessed John R. Barton, the corporation's executive vice president and secretary, for these unpaid taxes under 26 U.S.C. § 6672, which permits the IRS to collect unpaid taxes from persons responsible for a corporation's failure to pay. After Barton paid part of the taxes under protest and the IRS denied his claim for a refund, Barton filed a complaint in district court. The Government counterclaimed against Barton for the remaining unpaid taxes. Following a bench trial, the district court found Barton was not a responsible person within the meaning of § 6672. Barton then moved for court costs and attorney fees under 26 U.S.C. § 7430, asserting the Government's litigation position that he was a responsible person was not substantially justified. The district court denied the motion. Barton appeals, seeking court costs and attorney fees at the statutory rate of $75 an hour from the date the Government filed its counterclaim. We reverse and remand.

Under § 7430, a party who substantially prevails in a court proceeding brought by the government is eligible for court costs and attorney fees if the party proves the government's litigation position in the proceeding was not substantially justified. Kenagy v. United States, 942 F.2d 459, 463 (8th Cir.1991). The government's litigation position is not substantially justified if it lacks a reasonable basis in law and fact. Id. at 464. Because Barton prevailed on the responsible person issue in the district court, the parties agree this appeal turns on whether the district court abused its discretion in concluding Barton failed to prove the Government's litigation position that he was a responsible person under § 6672 was unreasonable. Id. at 463-64.

Section 6672 imposes liability for unpaid federal withholding taxes on corporate personnel who (1) have the corporate responsibility to collect, truthfully account for, and pay over the taxes; and (2) willfully fail to do so. Elmore v. United States, 843 F.2d 1128, 1132 (8th Cir.1988). A responsible person under § 6672 has "the status, duty and authority to avoid the corporation's default in collection or payment of the taxes." Kenagy, 942 F.2d at 464. To trigger § 6672 liability, a person must have significant decision-making authority over the corporation's tax matters. Id. A person's technical authority to sign checks and duty to prepare tax returns are not enough to make the person responsible under the statute. See id. at 464-65; Godfrey v. United States, 748 F.2d 1568, 1575 (Fed.Cir.1984); Barrett v. United States, 580 F.2d 449, 452-53 (Ct.Cl.1978).

Ordinarily, a responsible person is an officer of the corporation. Kenagy, 942 F.2d at 464-65. Officers who lack tax-paying authority, however, cannot be held liable under § 6672 because of their position alone. See Godfrey, 748 F.2d at 1575-76. Thus, when deciding to bring a § 6672 claim against a corporate officer, the government cannot reasonably rely on the officer's corporate status and mechanical functions if it is beyond dispute that the officer lacks tax-paying authority. Kenagy, 942 F.2d at 464; Godfrey, 748 F.2d at 1575-76.

The Government's position that Barton was a responsible person was based on the IRS investigation. In November 1985, the IRS assessed Barton for the taxes after discovering Barton was the corporation's second-in-command, Barton had the corporate authority to sign tax returns and checks for small purchases, a rubber stamp facsimile of Barton's signature appeared on payroll checks, and Barton knew the corporation had not met earlier tax obligations. Barton protested the assessment and sent the IRS affidavits from corporate officers and employees that explained Ray McMartin, the corporation's president, had exclusive control of all corporate funds and sole responsibility for paying taxes. McMartin also signed an affidavit confirming, "Barton had absolutely no responsibility for payment of employee withholding funds to the IRS."

After Barton filed his complaint in May 1988, the Government filed a counterclaim against Barton and McMartin for the unpaid taxes. The Government then deposed the same corporate officers and employees that signed affidavits for the IRS. All the witnesses testified Barton lacked tax-paying authority. McMartin testified he alone controlled the corporation's financial affairs, he authorized every check Barton signed, and he was the person responsible for the collection and paying over of the tax funds in question. The Government also deposed the president of one of the corporation's suppliers, who testified he felt Barton had financial authority in the corporation. The president admitted, however, he had no first-hand knowledge...