Greenberg v. U.S., 94-7075

Decision Date15 December 1994
Docket NumberNo. 94-7075,94-7075
Parties-7343, 95-1 USTC P 50,053, Unempl.Ins.Rep. (CCH) P 14328B Mark Z. GREENBERG, Appellant, v. UNITED STATES of America; Department of the Treasury; Internal Revenue Service, Appellees.
CourtU.S. Court of Appeals — Third Circuit

Robert E. Chernicoff (argued), Paige F. MacDonald, Farr & Cunningham, Harrisburg, PA, for appellant.

Loretta C. Argrett, Asst. Atty. Gen., David Barasch, U.S. Atty., Gary R. Allen, Jonathan S. Cohen (argued), Billie L. Crowe, Tax Div., U.S. Dept. of Justice, Washington, DC, for appellees.

Present: HUTCHINSON and NYGAARD, Circuit Judges, and LUDWIG, District Judge. *

OPINION OF THE COURT

HUTCHINSON, Circuit Judge.

Appellant, Mark Z. Greenberg ("Greenberg"), appeals an order of the United States District Court for the Middle District of Pennsylvania granting summary judgment in favor of appellee, United States of America ("United States"), on Greenberg's claim for a partial refund of an amount Greenberg paid on an Internal Revenue Service ("IRS") penalty assessment, and on the United States' counterclaim to reduce the balance of the assessment to judgment. In doing so, the district court upheld IRS's assessment of a 100% "penalty" against Greenberg under section 6672 of the Internal Revenue Code of 1954 (the "Code"), 26 U.S.C.A. Sec. 6672 (West Supp.1994), after finding that Greenberg was a "responsible person" who had "willfully" failed to pay over to IRS federal employment taxes owed by his employer, Turning Basin, Inc. ("Turning Basin" or the "Company"). We will affirm.

I. Factual & Procedural History

Turning Basin was a holding company which acquired other companies through leveraged buyouts. Greenberg, a certified public accountant since 1973, served initially as an outside accountant for Turning Basin while employed by Alan Moskowitz & Company. In late 1979, Greenberg accepted the position of in-house controller at Turning Basin. Soon after joining Turning Basin, Greenberg became its treasurer and assistant secretary and signed at least one corporate document, a loan guarantee, in this capacity. Greenberg also served as a member of Turning Basin's Board of Directors and in 1981 he received 40,000 shares of Turning Basin stock. Throughout Greenberg's tenure with Turning Basin, Arthur Tuchinsky ("Tuchinsky") was Chairman of its Board of Directors, as well as its Chief Executive Officer and controlling shareholder.

As controller of Turning Basin, Greenberg supervised a staff of one accountant and two bookkeepers and was responsible for the hiring and firing of employees within his department. Although Greenberg acknowledged he exercised this authority, he contended that decisions on hiring and firing were ultimately determined by Tuchinsky. Greenberg also testified that Tuchinsky set the salaries of all of Turning Basin's employees and officers.

As controller, Greenberg was also responsible for preparing financial statements and reports on the Company's subsidiaries. These statements and reports were included in quarterly or semi-annual reports to Turning Basin's stockholders. Greenberg coordinated Turning Basin's annual audits with its outside accounting firm and his department was responsible for overseeing payment of Turning Basin's creditors and reconciling the Company's checking account. He was an authorized signatory on all of Turning Basin's bank accounts and signed checks on all of them. Turning Basin's corporate checkbooks were first kept in Greenberg's office and later in the bookkeepers' office. Greenberg had access to these checkbooks at all times. At his deposition, Greenberg stated that although he had constant access to the Company's checkbooks and was an authorized signatory, he only wrote checks when directed to do so by Tuchinsky. Greenberg also testified that he was not authorized to raise cash on behalf of the Company or make wire transfers for Turning Basin without specific permission from Tuchinsky.

Sometime in 1981, Turning Basin began having cash-flow problems. Greenberg then became responsible for reviewing the accounts payable with Tuchinsky and assisting Tuchinsky in determining which creditors should be paid first. Once Greenberg and Tuchinsky decided who would be paid, Greenberg would sign checks to pay them. Whenever a check was returned for insufficient funds, the bank or creditor would contact either Greenberg or Tuchinsky in order to resolve the matter. According to Greenberg's deposition testimony, he and Tuchinsky would again discuss which current bills were most urgent and Tuchinsky would decide who to pay and where to find the money to pay them. Greenberg testified that he never refused to pay anyone that Tuchinsky told him to pay, nor did he ever pay any creditor Tuchinsky told him not to pay.

Greenberg was also responsible for preparing and filing Turning Basin's federal tax returns, including its federal employment tax returns on Forms 940 and 941. By 1981, Turning Basin was delinquent in remitting the withholding taxes to IRS. Greenberg was aware of the tax delinquency from the time it began. He testified that he discussed the tax delinquencies with Tuchinsky and repeatedly recommended that the taxes be paid. Greenberg testified that Tuchinsky assured him the taxes would get paid, and that Greenberg had believed these assurances. He admitted, however, that on at least one occasion Tuchinsky informed him that they must pay more urgent bills right away in order to keep the business going and would pay the taxes later.

Greenberg therefore continued to write checks to Turning Basin's employees and other creditors despite the existing withholding tax delinquencies. Because Tuchinsky was responsible for placing money in Turning Basin's checking accounts, Greenberg did not write a check to IRS for the withholding tax delinquencies because he knew there would be no funds in the account to cover the check. Greenberg also believed that if he did issue a check to IRS without Tuchinsky's approval, he would have been fired immediately. He acknowledged that he could have authorized wire transfers of cash from the subsidiary corporations' accounts to Turning Basin's accounts without Tuchinsky's instructions but did not do so because he felt it was beyond his authority.

Eventually, Tuchinsky told Greenberg to write checks to cover the withholding tax delinquencies. Greenberg did so, and when the checks were returned for insufficient funds, Greenberg confronted Tuchinsky. When he realized the tax liability would not be paid, Greenberg resigned as an officer and director of Turning Basin.

On February 9, 1987, the IRS entered an assessment under 26 U.S.C.A. Sec. 6672(a) against Greenberg for Turning Basin's delinquent withholding taxes. Greenberg paid $4,024.26 toward the assessment and on May 13, 1992 filed a complaint in the United States District Court for the Middle District of Pennsylvania seeking a refund. The United States filed an answer on October 6, 1992 along with a counterclaim seeking $14,456.52 plus interest which it claimed Greenberg still owed under the penalty provision.

On June 1, 1993, the United States filed a motion for summary judgment, which the district court granted on December 3, 1993. On February 4, 1994, the court entered an order amending the judgment to reflect Greenberg's additional payment of $2,335.13, making the balance due $23,881.68. The balance included $11,760.29 in interest which had accrued up to December 3, 1993.

II. Jurisdiction & Standard of Review

The district court had subject matter jurisdiction over this action pursuant to 28 U.S.C.A. Secs. 1340, 1346(a)(1) (West 1993) and 26 U.S.C.A. Secs. 7401, 7402 (West 1989). The district court had jurisdiction over the United States' counterclaim pursuant to 28 U.S.C.A. Sec. 1346(c) (West 1993). We have jurisdiction over the final order of the district court pursuant to 28 U.S.C.A. Sec. 1291 (West 1993).

We review the district court's grant of summary judgment de novo. United States v. Carrigan, 31 F.3d 130, 133 (3d Cir.1994). We consider all of the facts and inferences in the light most favorable to Greenberg, the nonmoving party, in order to determine whether there is a genuine issue of material fact. If no genuine issue of material fact remains, the moving part is entitled to judgment as a matter of law. 1 Id.

III. Analysis

Sections 3102 and 3401 of the Code require employers to withhold federal social security and income taxes from the wages of their employees. 26 U.S.C.A. Secs. 3102, 3401 (West Supp.1994). The taxes withheld constitute a special fund held "in trust" for the benefit of the United States. 26 U.S.C.A. Sec. 7501(a) (West 1989). Section 6672 of the Code imposes a penalty on certain persons for failure to turn over withholding taxes to the IRS. 26 U.S.C.A. Sec. 6672(a) (West Supp.1994). Specifically, it provides:

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....

Id.

There are two conditions before liability can be imposed under section 6672: first, the individual must be a "responsible person," and second, his or her failure to pay the tax must be "willful." See Carrigan, 31 F.3d at 133; Brounstein v. United States, 979 F.2d 952, 954 (3d Cir.1992). If an individual's conduct fails to meet either condition, the IRS may not assess a section 6672 penalty against him. With this in mind, we consider whether the district court correctly concluded that Greenberg was a responsible person who acted willfully when he failed to pay over Turning...

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