Carter v. US, 88 Civ. 0936(KC)

• Decision Date: 10 July 1989
• Docket Number: No. 88 Civ. 0936(KC),87 Civ. 9158(KC).,88 Civ. 0936(KC)
• Parties: James CARTER, Booker T. Jones, and Gladys Richardson, Plaintiffs, v. UNITED STATES of America, Defendant. Aliceteen TAYLOR, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Southern District of New York

717 F. Supp. 188

James CARTER, Booker T. Jones, and Gladys Richardson, Plaintiffs, v. UNITED STATES of America, Defendant.

Aliceteen TAYLOR, Plaintiff, v. UNITED STATES of America, Defendant.

Nos. 88 Civ. 0936(KC), 87 Civ. 9158(KC).

United States District Court, S.D. New York.

July 10, 1989.

Surkin & Handlin, New York City, for plaintiffs (Dean L. Surkin, of counsel.)

Benito Romano, U.S. Atty. for S.D.N.Y., for defendant (Amy Rothstein and Kaye Gardiner, of counsel.)

OPINION AND ORDER

CONBOY, District Judge:

The captioned consolidated actions arise out of the failure to pay to the Internal Revenue Service ("IRS") income and Federal Insurance Contributions Act ("FICA") taxes. The actions were brought by plaintiffs for recovery of the portion paid by each of them to the toward the assessment of a 100% penalty imposed upon each as "responsible persons" under 26 U.S.C. § 6672(a). The Government has filed counterclaims against each plaintiff, on the theory of joint and several liability, seeking from each the 100% penalty assessment plus interest. The motion currently pending before the Court is the government's motion for summary judgment.

I. Background

Covenant Home Attendant Services, Inc. ("CHAS") was formed as a not-for-profit New York Corporation by members of the Convent Avenue Baptist Church. CHAS, which went out of business on October 31, 1985 with no assets of the corporation available, was formed for the purpose of providing home care services for the elderly and disabled in Harlem. Funding for CHAS was provided by the City of New York. All of the plaintiffs were officers and directors of CHAS during the last two quarters of 1984 and the first three quarters of 1985, during which time CHAS failed to pay over to the IRS withholding and FICA taxes (sometimes referred to as "trust fund taxes") on behalf of its employees. Plaintiff Aliceteen Taylor ("Taylor") was Chairperson of the Board of Directors, plaintiff Booker T. Jones ("Jones") was Vice Chairperson, plaintiff Gladys Richardson ("Richardson") was Secretary, and plaintiff James Carter ("Carter") was Treasurer. Because of their roles in CHAS, the IRS assessed a 100% penalty in the amount of $230,245.86 against each of the plaintiffs pursuant to section 6672 of the Internal Revenue Code as of July 18, 1988. Plaintiffs each paid the withheld tax for one employee for one quarter of liability in the amount of $612.50, and filed a claim with the IRS for a refund of the amount paid, attaching a "Petition and Protest" to the claim form.¹See, e.g., Complaint filed by Taylor ("Taylor Complt.") and Exhibits appurtenant thereto. The Petitions were prepared by their attorney at that time, Jimmie L. Engram.² Attached to these Petitions were the minutes of the CHAS Board of Directors Meetings for March 22, 1984, May 3, 1984, June 12, 1984, July 31, 1984 and August 23, 1985 along with several memoranda. See Declaration of Albeda Hightower ¶ 2F and Exhibit F thereto ("Hightower Decl."). Plaintiffs claims were subsequently rejected, and the appeal to this Court followed.

CHAS had a payroll account at Manufacturers Hanover Trust and plaintiffs were the four authorized signatories. The signatures of any two of the four were necessary for the payroll checks to be honored. Hightower Decl., Ex. A. Furthermore, the Board's policy was to require, with each check forwarded for signature, a "supporting invoice attached to payment vouchers detailing purpose of check (sic)." Hightower Decl., Ex. F at 8. Plaintiffs state that the voucher provision was only meant to apply to extraordinary purchases and expenses, and not to payroll checks and withholding. Affidavit of James Carter, sworn to July 19, 1988, ("Carter Aff.") at ¶ 15(a).³ They concede the signature authority for the payroll account, yet state that actual checks were signed by the use of a machine that affixed facsimile signatures and that the checks were prepared by a bookkeeping agency designated by the City of New York, as a condition to City funding of CHAS. See Plaintiffs' Memorandum of Law at 3; Carter Aff. at ¶ 15(a). Because the checks were prepared by others and submitted to the Board, the plaintiffs state that they are not liable for the 100% penalty. The Government's response to the plaintiffs' claim is that this delegation of authority does not divest the Board of its responsibilities.

In addition to its allegation that the check submission procedure indicates that plaintiffs controlled all of CHAS' disbursements, the Government also asserts that the plaintiffs involved themselves in "routine business concerns such as corporate funding, bookkeeping, salaries, and hiring and firing." See Government's Memorandum of Law at 3-4. The plaintiffs dispute this by stating that they "were not involved in the daily operations of CHAS, and only became involved to the extent of supervising the highest level administrative employees. The Board did not deal directly with every level of operation." Carter Aff. ¶ 15(b).

Finally, it is undisputed that the corporation had "bookkeeping" problems. The Government posits that the Board was aware that there was a history of late payments with respect to employee withholding and FICA taxes. However, the Board states that "to the extent that it was aware that the payments were being paid late, the Board took immediate corrective action," consisting of "hiring outside accountants and terminating an employee who was derelict in his duties." Plaintiffs' Memorandum of Law at 3. There is, however, nothing in the record to indicate that payments to the IRS resumed after the Board took "corrective action." Indeed, because the plaintiffs were subsequently assessed for the deficiency, the clear implication is that such payments were never made. Plaintiffs also claim they "reasonably believed" that the withholding and FICA taxes were being paid, and "to the extent that they were not paid, it was due to the embezzlement and concealment thereof by administrative employees of CHAS." Carter Aff. ¶ 18. This latter position is a clear change from the plaintiffs' former position taken in each's Petition and Protest that the reason the taxes were late in being paid was "because of a lingering billing rate problem." Hightower Decl., Ex. E, ¶ 13.

II. Legal Analysis

The Internal Revenue Code (the "Code") requires employers to deduct social security and income taxes from the wages paid to employees. See 26 U.S.C. § 3102(a) (social security or FICA tax); id. § 3402(a) (income tax). The deducted amounts which are withheld from the paychecks are held by the employer as a special trust fund for the benefit of the United States, see id. § 7501, and must be paid to the government on a quarterly basis, see 26 C.F.R. § 31.6011(a)-4. Liability for the payment over of withholding taxes arises at the time the sums are withheld from the employees' wages rather than at the later date when the employer's quarterly tax return is filed. See Bolding v. United States, 565 F.2d 663, 669 (Ct.Cl.1977); Kalb v. United States, 505 F.2d 506, 511 (2d Cir.1974), cert. denied, 421 U.S. 979, 95 S.Ct. 1981, 44 L.Ed.2d 471 (1975). If the employer fails to make the required payments, the Government may actually suffer a loss because the employees are given credit for the amount of the taxes withheld regardless of whether the employer ever pays the money to the Government. See Bolding, 565 F.2d at 669. Accordingly, Section 6672 of the Code⁴ supplies an alternative method for collecting the withheld taxes. Pursuant to this section, the government may assess a penalty, equal to the full amount of the unpaid tax, against a person responsible for paying over the money who willfully fails to do so. The section reflects "a congressional judgment that because amounts withheld from employees salaries are `treated as a trust fund ... persons responsible for their paying over should be individually liable, as well as the corporation for their diversion.'" Schwinger v. United States, 652 F.Supp. 464, 466 (E.D. N.Y.1987) (quoting Spivak v. United States, 370 F.2d 612, 615 (2d Cir.), cert. denied, 387 U.S. 908, 87 S.Ct. 1690, 18 L.Ed.2d 625 (1967)). This section may only be utilized where the tax cannot be collected from the corporation itself. See Bolding, 565 F.2d at 669 & n. 3. Courts have recognized that "the statute is harsh, but the danger against which it is directed— that of failing to pay over money withheld from employees until it is too late, because the company has gone broke—is an acute one against which, perhaps, only harsh measures are availing." Wright v. United States, 809 F.2d 425, 428 (7th Cir.1987); accord Simpson v. United States, 664 F.Supp. 43, 45-46 (E.D.N.Y.1987).

The assessment of the tax, pursuant to Section 6672, creates a prima facie case of liability. See Lesser v. United States, 368 F.2d 306, 310 (2d Cir.1966) (en banc); Schwinger, 652 F.Supp. at 466. The persons against whom the penalty is levied bear the burden of establishing, by a preponderance of the evidence, that at least one of the two elements of the statute, as delineated below, has not been met. Schwinger, 652 F.Supp. at 466. Because the assessment is presumed valid, the facts underlying the assessment need not even be presented to the Court for summary judgment to be awarded. United States v. Mauro, 243 F.Supp. 413, 415 (S.D.N.Y. 1965); accord United States v. Blackwell, 76-2 U.S.T.C. ¶ 9742 at 85,387 (D.Conn. 1976). Plaintiffs have the burden of coming forward with evidence that demonstrates the existence of a genuine issue of material fact in order to defeat the motion. Plaintiffs state that their affidavits raise the issue of state of mind or intent, and therefore, summary judgment should not be granted.

A person is liable under Section 6672 if (1) he or she was under a duty to collect, account for, and pay over the taxes (a "responsible person"); and (2) the failure to pay the taxes was "willful." Schwinger, 652 F. Supp at 466; accor...