Hochstein v. U.S.

• Decision Date: 03 April 1990
• Docket Number: No. 89-6190,No. 625,D,625,89-6190
• Parties: -937, 90-1 USTC P 50,205, Unempl.Ins.Rep. CCH 15332A Arnold HOCHSTEIN, Plaintiff-Appellee, Counterclaim Defendant, v. UNITED STATES of America, Defendant-Appellant, Counterclaim Plaintiff. ocket
• Court: U.S. Court of Appeals — Second Circuit

Page 543

900 F.2d 543

65 A.F.T.R.2d 90-937, 90-1 USTC P 50,205,

Unempl.Ins.Rep. CCH 15332A

Arnold HOCHSTEIN, Plaintiff-Appellee, Counterclaim Defendant, v. UNITED STATES of America, Defendant-Appellant, Counterclaim Plaintiff.

No. 625, Docket No. 89-6190.

United States Court of Appeals, Second Circuit.

Argued Jan. 12, 1990.

Decided April 3, 1990.

Craig A. Stewart, Asst. U.S. Atty., S.D.N.Y. (Otto G. Obermaier, U.S. Atty., Nancy Kilson, James L. Garrity, Jr., Asst. U.S. Attys., S.D.N.Y., New York City, of counsel), for defendant-appellant, counterclaim plaintiff.

Stephen R. Sugrue (Lowenthal, Landau, Fischer & Ziegler, New York City, of counsel), for plaintiff-appellee, counterclaim defendant.

Before KAUFMAN, MESKILL and NEWMAN, Circuit Judges.

MESKILL, Circuit Judge:

In this appeal we consider the circumstances under which an individual may be held personally liable pursuant to 26 U.S.C. Sec. 6672 for withholding and Federal Insurance Contributions Act (FICA) tax payments that his former employer failed to make. Pursuant to section 6672, the Internal Revenue Service (IRS) assessed against Because we conclude that Hochstein was a person responsible for the collection and payment of Safelon's withholding taxes within the meaning of section 6672, and that his failure to comply with the statute was willful, we vacate the district court's judgment and remand with instructions to dismiss the complaint and enter judgment in favor of the government on its counterclaim.

plaintiff Hochstein a penalty equivalent to the amount of withholding and FICA taxes unpaid by his former employer, the Safelon Corporation (Safelon), for the first two quarters of 1981. Hochstein made partial payment and brought this action seeking a refund of the amount paid, an abatement of the unpaid assessment and an injunction prohibiting further collection efforts. The IRS counterclaimed for the balance of the unpaid assessment. After a two day trial before the United States District Court for the Southern District of New York, Leisure, J., the court denied the government's counterclaim and rendered judgment in favor of Hochstein. The government appeals.

BACKGROUND

The district court's factfinding is largely undisputed on appeal. The following is a brief summary of those facts essential to our disposition of this case. The district court's opinion, which sets forth the background in some detail, is reported at 713 F.Supp. 119 (S.D.N.Y.1989).

From 1963 to May 1981, Hochstein was the controller of Safelon, a manufacturing business located in Westchester County, New York. Hochstein was never a shareholder, director or officer of Safelon. As controller, Hochstein was responsible for overseeing the finances of the corporation, including the preparation of the payroll and the filing of Safelon's payroll tax returns. During the tax period in question, Hochstein and Ernest Eckstein, the President and majority shareholder of Safelon, were the only two individuals authorized to sign checks on behalf of Safelon.

Safelon experienced severe financial problems beginning in the early 1970s. Due to its poor financial condition, Safelon entered into a financing agreement (the Agreement) with the firm of Rosenthal & Rosenthal (Rosenthal) in 1979. Under the Agreement, Rosenthal supplied operating funds to Safelon in return for a security interest in Safelon's accounts receivable and physical assets. Although Hochstein had no input into Safelon's decision to enter into the Agreement, he was the primary person who dealt with Rosenthal on behalf of Safelon once the Agreement was in place.

Pursuant to the Agreement, Hochstein would request that Rosenthal advance funds to Safelon, indicating the purpose for which he was requesting them. Rosenthal decided whether or not to grant Hochstein's requests based on a formula contained in the Agreement. Rosenthal did not earmark any specific purposes for the funds advanced and did not control the actual use to which the funds were put once they were given to Safelon. The indebtedness created by these advances was reduced by Safelon's accounts receivable: Safelon forwarded all checks and cash that it received directly to Rosenthal. The net effect of this arrangement was that Safelon's only operating funds were those that Rosenthal chose to provide. Nevertheless, the Agreement provided that Safelon remained responsible for making all tax payments.

In January 1981, Safelon's financial condition worsened, and Rosenthal refused to fund continuing operations. Safelon was forced to reduce its workforce to a skeleton staff, and operated only to convert the raw materials that remained in inventory into finished product. In the process, Safelon became heavily indebted to Rosenthal. As a result, Rosenthal decided to liquidate Safelon's physical assets. Thereafter, Hochstein was provided with sharply reduced funds, sufficient only to pay for the bare essentials during the liquidation process; for example, oil for a generator, gasoline for delivery trucks, and net payroll for the remaining employees, including Hochstein. Most creditors went unpaid.

Safelon ceased making the withholding and FICA tax payments from its employees' wages in the fourth week of January 1981. After that point, Hochstein requested that Rosenthal provide funds for the taxes, but Rosenthal gave Hochstein only enough money to cover net wages. Hochstein paid these net wages to the remaining employees until he left Safelon in May 1981. He also signed and filed Safelon's payroll tax return for the first quarter of 1981. This return indicates that Safelon remitted payment only for the first three weeks of the quarter.

Safelon's physical assets were liquidated some time during the spring of 1981, and the proceeds were used to reduce Safelon's debt to Rosenthal. Safelon ceased operations altogether in the second week of May 1981.

Pursuant to section 6672, the IRS assessed against Hochstein a penalty equivalent to the unpaid withholding and FICA taxes. Hochstein made partial payment and commenced this action seeking recovery of the amount paid, an abatement of the unpaid portion of the assessment, and an injunction prohibiting the IRS from taking further steps to collect the tax from him. The IRS counterclaimed for the balance of the unpaid assessment, totalling $31,577.51 plus interest.

The district court held that Hochstein was not a person responsible for collecting and paying Safelon's withholding taxes within the meaning of section 6672, and that even if he was responsible, Hochstein incurred no personal liability because he did not willfully fail to make the tax payments.

DISCUSSION

Section 6672 provides, in pertinent part:

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 ... be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

26 U.S.C. Sec. 6672(a). It is well established that the statute requires two elements to be present before personal liability for unpaid withholding taxes attaches: first, the individual must be a person responsible for the collection and payment of withholding taxes, i.e., he must have the authority to direct the payment of corporate funds; second, the individual's failure to comply with the statute must be willful. See, e.g., Caterino v. United States, 794 F.2d 1, 3 (1st Cir.1986), cert. denied, 480 U.S. 905, 107 S.Ct. 1347, 94 L.Ed.2d 518 (1987); Teel v. United States, 529 F.2d 903, 905 (9th Cir.1976); Werner v. United States, 374 F.Supp. 558, 560 (D.Conn.1974), aff'd on opinion below, 512 F.2d 1381 (2d Cir.1975). The individual against whom the assessment is made bears the burden of proving by a preponderance of the evidence that one or both of these elements is not present. See, e.g., Calderone v. United States, 799 F.2d 254, 258 (6th Cir.1986); Lesser v. United States, 368 F.2d 306, 310 (2d Cir.1966) (in banc). Hochstein failed to meet this burden.

A. Responsibility

1. Standard of Review

The preliminary question is by what standard we should review the district court's findings and conclusion on the issue of Hochstein's responsibility for the payment of Safelon's taxes. Most courts that have addressed the issue of the proper scope of review have treated the question of responsibility as a factual finding that may not be set aside unless clearly erroneous. See Gustin v. United States, 876 F.2d 485, 491 (5th Cir.1989); Caterino, 794 F.2d at 3, 5; Maggy v. United States, 560 F.2d 1372, 1375 (9th Cir.1977), cert. denied, 439 U.S. 821, 99 S.Ct. 86, 58 L.Ed.2d 112 (1978). This approach is facially appealing because, as discussed below, whether an individual is responsible for the payment of a corporation's withholding taxes depends primarily on the factual question of the degree of control he exercises over the

corporation's finances. Nevertheless, we believe that the issue whether a person is responsible within the meaning of section 6672 presents a mixed question of fact and law. See Thibodeau v. United States, 828 F.2d 1499, 1503 (11th Cir.1987) (deciding question of responsibility as question of law when facts undisputed). Therefore, we will review the district court's findings on Hochstein's control over Safelon's finances only for clear error, and give plenary review to its conclusion that this control did not make him responsible within the meaning of the statute. Cf. Puma Indus. Consulting, Inc. v. Daal Assocs., Inc., 808 F.2d 982, 986 (2d Cir.1987) ("When a conclusion represents a mixed question of law and fact, ... that conclusion is open to full review.").

2. The Merits

The government argues that, in determining that Hochstein was not a person responsible for the payment of Safelon's withholding taxes, ...