Cheatle v. U.S.

• Decision Date: 09 December 2008
• Docket Number: Civil No. 3:07CV00062.
• Parties: Walter M. CHEATLE, Plaintiff, v. UNITED STATES of America, Defendant.
• Court: U.S. District Court — Western District of Virginia

589 F.Supp.2d 694

Walter M. CHEATLE, Plaintiff, v. UNITED STATES of America, Defendant.

Civil No. 3:07CV00062.

United States District Court, W.D. Virginia, Charlottesville Division.

December 9, 2008.

COPYRIGHT MATERIAL OMITTED

Brian Keith Brake, John F. Cale, John Warren Flora, Lenhart Obenshain, PC, Harrisonburg, VA, Patrick C. Asplin, Lenhart Obenshain PC, Charlottesville, VA, for Plaintiff.

Duston K. Barton, Department of Justice, Washington, DC, for Defendant.

MEMORANDUM OPINION

NORMAN K. MOON, District Judge.

This matter is before the Court on the United States' Motion for Summary Judgment (docket no. 13) and Walter Cheatle's Motion for Partial Summary Judgment (docket no. 16). On November 16, 2007, Cheatle ("Plaintiff") filed a Complaint (docket no. 1) against the United States ("Defendant") to recover penalties and interest that he claims was erroneously and wrongfully collected by Defendant in connection with his payment of employment taxes on behalf of Growers of Culpeper, Inc ("Growers"). Defendant counterclaimed (docket no. 2) and later filed a Motion for Summary Judgment, seeking to recover a trust fund recovery penalty ("TFRP") from Plaintiff for Growers' unpaid taxes in the amount of $150,155.57 plus interest accruing after June 2, 2008, pursuant to 26 U.S.C. § 6672. Plaintiff, while not acknowledging the validity of the tax liability claimed by Defendant, then filed a Motion for Partial Summary Judgment requesting that the Court credit his alleged tax liability with a TFRP payment made by James Soelder, the former President of Growers, in the amount of $44,011.24, plus interest accruing after September 27, 1999. For the reasons discussed below, Defendant's Motion for Summary Judgment is GRANTED and Plaintiffs Motion for Partial Summary Judgment is GRANTED.

I. BACKGROUND

Growers owned and operated a six-acre greenhouse in Stevensburg, Virginia. The company grew and sold various plants at wholesale prices to retail stores. In the early 1990s, Growers was owned and operated by Arie Boot, James Soelder, and Peter Chaconas. Boot was President and a member of the Board of Directors. When Boot resigned from his positions in 1992, Soelder and Chaconas purchased his interest, leaving them each with fifty percent ownership in the company. Chaconas then hired Plaintiff, who was elected to the Board of Directors and served as Secretary and Treasurer of Growers. Soelder served as President, and Chaconas served as Vice President. Because Chaconas was largely an absentee owner who secured the initial financing for Growers in exchange for his ownership interest, Soelder and Plaintiff partnered in the day-to-day management of the company. While Soelder focused on growing plants and ensuring their shipment to customers, Plaintiff primarily promoted sales, sought out new customers, and oversaw the financial management of the company. The extent of Plaintiffs involvement with Growers will be explained in much greater detail below.

In 1995, Growers withheld income and employment taxes from its employees but failed to remit the taxes to the Internal Revenue Service ("IRS") for January, February, March, August, September, and parts of April. Plaintiff was aware of these outstanding tax liabilities as they accrued. In the fall of 1995, a dispute between the owners of Growers caused the company to file for bankruptcy. Growers never paid its outstanding tax liability for 1995. Unable to recover the withholding taxes from Growers, Defendant assessed a TFRP against both Soelder and Plaintiff in 1998. On February 2, 1999, Soelder agreed to pay $44,011.24 of the TFRP. The IRS erroneously refunded the $44,011.24 to Soelder on April 3, 2006 and is now suing him to retrieve the refund. Plaintiff claims he never received the letter proposing to assess the TFRP because it was sent to as address at which he no longer resided.

Defendant claims it is entitled to summary judgment against Plaintiff in the amount of $150,155.57, plus interest accruing after June 2, 2008, because Plaintiff was a responsible officer who willfully failed to collect, truthfully account for, and pay over Growers' withholding taxes. While in no way acknowledging the validity of the alleged tax liability, Plaintiff moves the Court to grant partial summary judgment in his favor crediting Soelder's $44,011.24 payment towards the TFRP assessment, plus interest accruing as of September 27, 1999.

II. APPLICABLE LAW

A. SUMMARY JUDGMENT STANDARD OF REVIEW

Federal Rule of Civil Procedure 56(c) provides that a court should grant summary judgment "if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). "As to materiality ... [o]nly disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In order to preclude summary judgment, the dispute about a material fact must be "`genuine,' that is, if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id. However, if the evidence of a genuine issue of material fact "is merely colorable or is not significantly probative, summary judgment may be granted." Id. at 250, 106 S.Ct. 2505.

In considering a motion for summary judgment under Rule 56, the court must view the record as a whole and draw reasonable inferences in the light most favorable to the nonmoving party. See, e.g., id. at 248-50, 106 S.Ct. 2505 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 322-24, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); In re Apex Express Corp., 190 F.3d 624, 633 (4th Cir.1999).

If the nonmoving party bears the burden of proof, "the burden on the moving party may be discharged by `showing'— that is, pointing out to the district court— that there is an absence of evidence to support the nonmoving party's case." Celotex, 477 U.S. at 325, 106 S.Ct. 2548. If the moving party shows such an absence of evidence, the burden shifts to the nonmoving party to set forth specific facts illustrating genuine issues for trial. See Fed. R.Civ.P. 56(e); Celotex, 477 U.S. at 324, 106 S.Ct. 2548.

A court should grant a motion for summary judgment if, after adequate time for discovery, the nonmoving party fails to make a showing "sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322, 106 S.Ct. 2548. The nonmoving party "may not rely merely on allegations or denials in its own pleading; rather, its response must—by affidavits or as otherwise provided in [Rule 56]—set out specific facts showing a genuine issue for trial." Fed.R.Civ.P. 56(e)(2). Indeed, the nonmoving party cannot defeat a properly supported motion for summary judgment with mere conjecture and speculation. Glover v. Oppleman, 178 F.Supp.2d 622, 631 (W.D.Va.2001) ("Mere speculation by the non-movant cannot create a genuine issue of material fact."). The trial judge has an "affirmative obligation" to "prevent `factually unsupported claims and defenses' from proceeding to trial." Felty v. Graves-Humphreys Co., 818 F.2d 1126, 1128 (4th Cir.1987) (quoting Celotex, 477 U.S. at 317, 106 S.Ct. 2548).

B. TRUST FUND RECOVERY PENALTY

Federal law requires employers to withhold federal income and social security taxes from employee wages and pay those taxes into the U.S. Treasury. 26 U.S.C. §§ 3102, 3402, 7501. Because the employer holds the taxes in trust for the United States, the taxes are typically called "trust fund taxes." See Slodov v. United States, 436 U.S. 238, 243, 98 S.Ct. 1778, 56 L.Ed.2d 251 (1978). Such taxes are for the exclusive use of the Government and "are not to be used to pay the employer's business expenses, including salaries." Gephart v. United States, 818 F.2d 469, 472 (6th Cir.1987). Under 26 U.S.C. § 6672, the Government is permitted to collect a TFRP from "[a]ny 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."¹

Liability under 26 U.S.C. § 6672 requires proof that the employee (1) was a "responsible person" with a duty to collect, account for, and pay over trust fund taxes, and (2) willfully failed to discharge his duty as a responsible person. Turpin v. United States, 970 F.2d 1344, 1347 (4th Cir.1992). Because the United States' tax assessments are presumptively correct, see United States v. Fior D'Italia, Inc., 536 U.S. 238, 242-43, 122 S.Ct. 2117, 153 L.Ed.2d 280 (2002), an employee assessed with a TFRP must "demonstrate that he was not a responsible person or that his failure to pay the taxes was not willful." United States v. Pomponio, 635 F.2d 293, 296 (4th Cir.1980).

III. DISCUSSION

A. "RESPONSIBLE PERSON" UNDER § 6672

To determine whether an employee is a "responsible person" under § 6672, courts "undertake a pragmatic, substance-over-form inquiry into whether an officer or employee so `participated in decisions concerning payment of creditors and disbursement of funds' that he effectively had the authority—and hence a duty—to ensure payment of the corporation's payroll taxes." Plett v. United States, 185 F.3d 216, 219 (4th Cir.1999) (quoting O'Connor v. United States, 956 F.2d 48, 51 (4th Cir.1992)). "Stated differently, the `crucial inquiry is whether the person had the effective power to pay the taxes—that is, whether he had the actual authority or ability, in view of his status within the corporation, to pay the taxes owed.'" Id. (quoting Barnett v. Internal Revenue Serv., 988 F.2d 1449, 1454 (5th Cir.1993)).

While a "responsible...