Erwin v. U.S.

• Decision Date: 13 January 2010
• Docket Number: No. 08-1564.,08-1564.
• Citation: 591 F.3d 313
• Parties: Charles B. ERWIN, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee, v. Stephen C. Coggin; William G. Pintner; James Barry Light; Hartsell B. Light, Jr., Third Party Defendants.
• Court: U.S. Court of Appeals — Fourth Circuit

591 F.3d 313

Charles B. ERWIN, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee, v. Stephen C. Coggin; William G. Pintner; James Barry Light; Hartsell B. Light, Jr., Third Party Defendants.

No. 08-1564.

United States Court of Appeals, Fourth Circuit.

Argued: September 23, 2009.

Decided: January 13, 2010.

ARGUED: Emma Claire Merritt, Tuggle, Duggins & Meschan, PA, Greensboro, North Carolina, for Appellant. Christine Durney Mason, United States Department of Justice, Washington, D.C., for Appellee. ON BRIEF: J. Nathan Duggins, III, Tuggle, Duggins & Meschan, PA, Greensboro, North Carolina, for Appellant. John A. DiCicco, Acting Assistant Attorney General, Kenneth L. Greene, United States Department of Justice, Washington, D.C.; Anna Mills S. Wagoner, United States Attorney, Greensboro, North Carolina, for Appellee.

Before MOTZ, Circuit Judge, HAMILTON, Senior Circuit Judge, and Irene M. KEELEY, United States District Judge for the Northern District of West Virginia, sitting by designation.

Affirmed by published opinion. Judge MOTZ wrote the majority opinion, in which Judge KEELEY joined. Senior Judge HAMILTON wrote a dissenting opinion.

OPINION

DIANA GRIBBON MOTZ, Circuit Judge:

This appeal arises from the district court's imposition of personal liability on Charles Erwin for payroll withholding taxes owed by GC Affordable Dining, Inc. ("GCAD"). Erwin owned a one-third interest in GCAD and served as a GCAD corporate officer and director, and, on behalf of GCAD, selected business sites, hired and fired employees, and negotiated and personally guaranteed loans and other contracts for the company. The district court held as a matter of law that Erwin (1) was responsible for payment of these taxes and (2) willfully failed to pay them. Erwin challenges both holdings on appeal. For the reasons that follow, we affirm.

I.

Over the last 25 years, Erwin, a North Carolina entrepreneur, has owned or operated at least 60 restaurants. In June 1994, Erwin joined with three other North Carolina businessmen—Geoffrey Grenert, Stephen Coggin, and John Miracle—to form GCAD, a franchisee of Golden Corral Franchising System, Inc. ("Golden Corral"). GCAD eventually opened and operated five Golden Corral restaurants.

At GCAD's founding, Erwin and Grenert each owned one third of the corporate stock; Coggin and Miracle each owned one sixth of the stock. Shortly thereafter, Grenert left the enterprise; eventually, Miracle sold his interest in GCAD to Mark Cole. But at all times, Erwin retained at least a one-third interest in the company.

In addition to owning all of the corporate stock in GCAD, Erwin and his partners served as its directors and officers. Coggin served as president, Miracle (and later Cole) as vice president, and Erwin as vice president, secretary, and treasurer.¹ The partners hired two managers to oversee day-to-day operations, payroll, and accounting.

In early 1995, Erwin and his partners— along with their wives—personally guaranteed construction and operating lines of credit with First Union Bank for GCAD. Erwin and his partners also secured a construction line of credit for a corporation, Tiffany, LLC, which they established as a flow-through real estate holding company for GCAD. Tiffany leased or purchased land and equipment for the restaurants; GCAD, in turn, leased the land and equipment from Tiffany.

Erwin participated in selecting sites for the restaurants and signed lease-related documents for all restaurant locations on behalf of both Tiffany and GCAD. Erwin also personally guaranteed rent payments on at least four of the leases, and personally guaranteed lines of credit from food vendors for the benefit of the GCAD restaurants.

Despite early profits, the GCAD restaurants soon began to lose money. In January 1997, Erwin and his partners decided to fire one of the original day-to-day managers and consolidate operations under the other. Erwin expressly acknowledged his "involve[ment]" in both decisions. During 1997, Erwin conferred at least weekly with Coggin regarding GCAD's affairs. Moreover, Erwin and his partners met monthly during 1997, and at least quarterly in 1998, to discuss GCAD matters. In an effort to improve business, Erwin also visited the GCAD restaurants and met with store managers during 1997 and 1998.

Unfortunately, business did not improve. GCAD had a negative operating cash flow of $2 million by the end of 1997, and thus had difficulty paying its creditors. In early 1998, Erwin and Coggin negotiated a payment plan to settle GCAD debts owed to one food vendor, LoPresti, with whom Erwin had personally guaranteed GCAD's line of credit.

During this period, Erwin and his partners decided to replace the remaining original manager with William Pintner, a seasoned Golden Corral employee. On a weekly basis, Pintner and Erwin discussed sales figures and strategies to increase profits.² Early in Pintner's tenure, he recommended that the partners fire their accountant and hire Barry and Buddy Light (the "Light brothers") to handle accounting and payroll for GCAD; the partners followed this advice.

Despite these efforts, GCAD continued to lose money. In December 1998, Erwin and his partners learned that the Light brothers had failed to pay the entire quarterly payroll tax withholdings for the third quarter of 1998. The partners made a capital call for approximately $150,000 and wired the money to the Light brothers with instructions. Erwin, who contributed $95,000 of the $150,000, testified that he personally instructed the Light brothers "that absolutely under no circumstances whatsoever were [the Light brothers] ever to be late with any taxes." Despite Erwin's admonition, the Light brothers failed to pay in full the payroll taxes for the fourth quarter of 1998.

Coggin testified that in late 1998, he and Erwin also sent the Light brothers $50,000 for additional payment to the favored food vendor, LoPresti, and instructed the Light brothers not to pay the rent because Erwin and Coggin themselves would handle the rent payments directly. Erwin never testified to the contrary.

Also in late 1998, Erwin became involved in negotiations—which became final in May 1999—to release GCAD from obligations under one of its leases. The landlord, seeking to terminate the lease to accommodate another party, agreed to wire $1.65 million to CNL American Properties Fund, Inc. ("CNL"), a company financing GCAD's restaurant building and equipment, to cover rents GCAD owed CNL on that and other leases. At that time GCAD—and Erwin as personal guarantor—owed CNL substantial rental payments.

GCAD's financial condition continued to worsen throughout 1999, and GCAD did not pay in full its withholding taxes for the first three quarters of that year. In August 1999, Erwin and his two partners learned of this latest delinquency. In December 1999, the partners made another capital contribution of $50,000 to help cure these deficiencies, but GCAD never paid the taxes in full. Nevertheless, Erwin and his partners continued to employ the Light brothers.

In February 2000, Erwin and his partners finally fired the Light brothers. After doing so, Erwin decided to take control of GCAD accounting functions, including payroll. He moved GCAD's financial operations from Ohio to the North Carolina offices of his solely owned company, Chelda. After that time, GCAD remained current on its payroll withholding payments. In late 2000, Erwin became the 100 percent owner of GCAD; shortly thereafter he dissolved the corporation. Between August 1999 and the close of business in 2000, the GCAD restaurants generated approximately $5 million in sales revenue. Rather than paying the outstanding 1998 and 1999 tax deficiencies, however, GCAD continued to pay rent and supplier expenses. Erwin acknowledged that, pursuant to his direction, GCAD paid its landlord and suppliers rather than the IRS; he maintained that GCAD did so because this was the only way to remain in business.

Following the demise of GCAD, the IRS assessed tax deficiencies against Erwin in the amount of the unpaid payroll withholding taxes owed by GCAD. Erwin paid a portion of the assessed amounts and then brought this action against the United States to recover those amounts. The Government counterclaimed for $264,579, the amount of GCAD's unpaid deficiencies from the fourth quarter of 1998 and the first three quarters of 1999, plus interest. The United States subsequently filed third-party complaints against Coggin, Pintner, and the Light brothers.

The parties filed cross motions for summary judgment. The district court, adopting the recommendation of the magistrate judge, denied Erwin's motion and granted the Government's. The court also granted the Government's motions to issue a final judgment against Erwin and stay the proceedings against Coggin, Pintner, and the Light brothers pending the outcome of Erwin's anticipated appeal.

Erwin timely noted this appeal.

II.

The Internal Revenue Code requires employers to withhold social security and federal excise taxes from their employees' wages. See 26 U.S.C. §§ 3402(a), 3102(a) (2006); Plett v. United States, 185 F.3d 216, 218 (4th Cir.1999). The employer holds these monies in trust for the United States. 26 U.S.C. § 7501(a) (2006). Accordingly, courts often refer to the withheld amounts as "trust fund taxes"; these monies exist for the exclusive use of the government, not the employer. See Plett, 185 F.3d at 218. Payment of these trust fund taxes is "no[t] excuse[d]" merely because "as a matter of sound business judgment, the money was paid to suppliers ... in order to keep the corporation operating as a going concern—the government cannot be made an unwilling partner in a floundering business." Collins v. United States, 848 F.2d 740, 741-42 (6th Cir.1988).

The Code "assure[s] compliance by the employer with its obligation ... to pay" trust fund taxes by imposing personal liability on officers or...