In re Rossiter, Bankruptcy No. SA 91-31295 JW.

• Citation: 167 BR 919
• Decision Date: 03 May 1994
• Docket Number: Bankruptcy No. SA 91-31295 JW.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Central District of California
• Parties: In re Bruce G. ROSSITER, Debtor.

167 B.R. 919 (1994)

In re Bruce G. ROSSITER, Debtor.

Bankruptcy No. SA 91-31295 JW.

United States Bankruptcy Court, C.D. California.

May 3, 1994.

Bruce G. Rossiter, in pro. per.

Terree A. Bowers, U.S. Atty., Mason C. Lewis, Asst. U.S. Atty., for claimant U.S.

MEMORANDUM OF DECISION

JOHN J. WILSON, Bankruptcy Judge.

This case involves the claim of the Internal Revenue Service (hereinafter "IRS") against Bruce G. Rossiter (hereinafter "Debtor"), regarding the alleged liability of the Debtor under Internal Revenue Code § 6672(a), as a "responsible person" who willfully failed to ensure that withholding taxes were paid over to the IRS.

I. STATEMENT OF FACTS

The claim of the IRS against Debtor arose from a federal payroll tax deposit in the amount for $343,000.00, which was made by San/Bar Corporation (hereinafter "San/Bar") on September 23, 1987. San/Bar was principally owned by Barry and Lloyd Hallamore (hereinafter "Hallamores"). On September 15, 1987, San/Bar was merged into Resdel Industries (hereinafter "Resdel") to form a new entity, Sanbar Corporation (hereinafter "Sanbar").

Just prior to the merger, the employment contracts of the Hallamores were bought out by San/Bar for a large cash payment. A federal payroll tax deposit was made by San/Bar to cover the withholding tax obligation arising in connection with the payments to the Hallamores. However San/Bar's federal payroll tax return for the third quarter of 1987 failed to report the buyout payments made to the Hallamores. Thus, the tax return understated the total compensation actually paid to the Hallamores, which caused the IRS to send Sanbar a refund check for $390,306.52 in March of 1989.

Within a few weeks of the IRS refund, several of the officers of Sanbar as well as the Debtor met and discussed the refund. At the time, Debtor was not an officer or employee of Sanbar, but rather a director of Resdel. No one at the meeting had been able to determine the nature of the refund. The following day, Sanbar's president transferred $200,000.00 of the refund monies to the Phoenix Group, the parent company of Resdel and a creditor of Sanbar, while the remainder of the funds was used by Sanbar as working capital. The decision to pay Phoenix Group was not discussed at the meeting, nor did Debtor participate in such decision.

In the latter part of 1989, an IRS agent examining the books of Sanbar discovered that the refund had arisen from the $343,000.00 deposit made in connection with the buyout of the Hallamores' employment contracts. In May of 1990, the IRS assessed $477,073.98 in payroll taxes, interest, and penalties against Sanbar. On December 22, 1989, an IRS agent sent a letter to the Debtor, in his capacity as an officer of Resdel, requesting that the refund be returned to the IRS and advising that the Debtor could be held personally liable.

On December 11, 1989, the Debtor was named president and secretary of Sanbar. On January 29, 1990, Rossiter & Company, an entity controlled by the Debtor, acquired a controlling interest in Sanbar. Debtor testified that prior to January 29, 1990, he never participated in the decisions and/or operations of Sanbar.

Shortly after taking control of Sanbar, the Debtor entered into negotiations with the IRS concerning the payroll taxes. Debtor contends that at such time Sanbar had an average daily balance in its operating accounts of $5,329.64, and had no funds available to pay the IRS above the minimal working capital needs of Sanbar. During the relevant time periods on and after January 29, 1990, all of Sanbar's receipts were deposited to the operating bank account. In or about October of 1990, pursuant to an oral agreement, Sanbar commenced payments of $1,000.00 per month to the IRS, though a formal written agreement was not signed until August of 1991. On June 6, 1990, Sanbar was restructured in a transaction where the assets of Sanbar were sold to another subsidiary of Resdel, and renamed Sanbar Telecommunications, Inc. The Debtor continued to operate the business under the new name, Sanbar Telecommunications, Inc. The Debtor filed for bankruptcy on February 12, 1991. In May of 1992, Sanbar Telecommunications, Inc., filed for bankruptcy.

On March 4, 1991, the IRS assessed $343,021.92 in penalties against the Debtor under I.R.C. § 6672. On or about June 17, 1992, the IRS filed a claim against the Debtor's bankruptcy estate. On November 24, 1992, the Debtor filed an objection to the claim of the IRS, and on December 11, 1992, an amendment to the objection.

II. DISCUSSION

The IRS contends the Debtor is liable for the 100 percent penalty provision under Internal Revenue Code § 6672(a), as a "responsible person" from and after January 29, 1990, who willfully failed to ensure that withholding taxes of Sanbar were paid over to the IRS. I.R.C. § 6672(a) states in relevant 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, 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."

For the purposes of this statute, the term "person" includes an officer or employee of a corporation, who as such officer or employee is under a duty to perform the act which respect to which the violation occurs. I.R.C. § 6671(b). The accepted test for liability under § 6672 is that the individual (a) must be a person who is responsible for the collection, accounting or paying over of the payroll withholding taxes, and (b) must have willfully failed to carry out this responsibility. Elmore v. United States, 843 F.2d 1128, 1132 (8th Cir.1988).

It is undisputed that the Debtor took control of Sanbar, a financially beleaguered company, long after the payroll tax obligation became due. The IRS concedes the Debtor was not a "responsible" officer of Sanbar when the tax obligation arose or at anytime prior to January 29, 1990. Thus, the question before the court is limited to whether the Debtor is liable to the IRS under I.R.C. § 6672 for his actions or inaction occurring on or after January 29, 1990. Stated otherwise, can the Debtor be held liable under § 6672 where the obligation for the trust fund taxes arose long before Debtor took control over the corporation?

The seminal case regarding this issue is Slodov v. United States, 436 U.S. 238, 98 S.Ct. 1778, 56 L.Ed.2d 251 (1978). Slodov purchased the stock of three corporations and assumed control at a time when the corporations had no liquid assets to satisfy a delinquency that existed for federal taxes. The taxes had been withheld from the wages of the corporations' employees, but had not been paid over to the IRS by the previous management of the corporations. That management had dissipated the specific funds which had been withheld prior to Slodov assuming control of the corporations. After Slodov assumed control, the corporations acquired funds sufficient to pay the delinquency, but instead used the funds to meet the operating expenses of the corporations. Thereafter, Slodov withdrew from the corporations' business and instituted bankruptcy proceedings. The IRS sought to hold Slodov personally liable pursuant to § 6672, arguing that the penalty attached when Slodov paid other creditors over the IRS. The Sixth Circuit Court of Appeals held in favor of the IRS, concluding that Slodov...