Jean v. U.S., 04-1121.

• Decision Date: 03 February 2005
• Docket Number: No. 04-1121.,04-1121.
• Citation: 396 F.3d 449
• Parties: Paul JEAN, Plaintiff, Appellant, v. UNITED STATES, Defendant, Appellee.
• Court: U.S. Court of Appeals — First Circuit

396 F.3d 449

Paul JEAN, Plaintiff, Appellant, v. UNITED STATES, Defendant, Appellee.

No. 04-1121.

United States Court of Appeals, First Circuit.

Heard November 4, 2004.

Decided February 3, 2005.

As Amended March 8, 2005.

Timothy J. Burke, for appellant.

Michelle B. O'Connor, Attorney, with whom Eileen J. O'Connor, Assistant Attorney General, and Kenneth L. Greene, Attorney, Tax Division, Department of Justice, were on brief for appellee.

Before SELYA, Circuit Judge, STAHL, Senior Circuit Judge, and LYNCH, Circuit Judge.

STAHL, Senior Circuit Judge.

The Internal Revenue Service ("IRS"), acting pursuant to 26 U.S.C. § 6672, assessed a penalty against Appellant Paul Jean ("Paul"), an employee of Focus Financial Services ("Focus"), for unpaid income and social security taxes withheld from the wages of Focus' employees in 1992. Paul paid a portion of the assessment and, after exhausting his administrative remedies, sued the IRS in the United States District Court for the District of Massachusetts for a refund and an abatement of the balance of the assessment.¹ The government filed a counterclaim, seeking to recover the balance of the assessment. At the close of the evidence at trial, the district court entered judgment in Paul's favor. Paul, then, filed a motion to recover his administrative and litigation costs under 26 U.S.C. § 7430. The district court, in denying the motion, found that the government was substantially justified in issuing the assessment and pursuing the litigation. Paul now seeks review of that denial. Finding no error, we affirm.

I. Background

In 1985, Michael Pottle ("Pottle") incorporated Focus. He served as Focus' president and treasurer and was the company's sole shareholder. Pottle hired George Jean ("George") to serve as the company's vice-president and general manager. Initially, Focus provided debt collection services out of an office in Plymouth, Massachusetts. By 1987, Focus also had a credit reporting business in Lynn, Massachusetts.² Notwithstanding this expansion, even after 1987, all of the company's bills were paid out of its Plymouth office.

In 1987, Pottle hired George's son, Paul, to work part-time as a bookkeeper for Focus. Paul was given full signatory authority over Focus' bank accounts; that is, he had the power to disburse funds from the company's accounts.³ Paul, who worked in the Plymouth office, signed many of the checks issued by Focus, including checks issued to cover Focus' tax liabilities.

Sometime in 1991, Focus began having financial difficulties, which culminated in its failure to pay the IRS taxes that had been withheld from its employees' wages for the first three quarters of 1992. During those quarters, however, Focus continued to pay its employees and other creditors.

Paul signed most of the checks that Focus issued in the first two quarters of 1992 — he signed 114 checks, transferring $284,353.22 to Focus' creditors, of which $202,360.96 was paid to creditors other than the IRS. On August 2, 1992, during the third quarter, Paul relinquished his signatory authority; apparently, he feared being held liable for Focus' failure to pay the IRS.

On December 20, 1994, pursuant to 26 U.S.C. § 6672, the IRS proposed to assess Paul for Focus' unpaid withholding obligations. The IRS viewed Paul as a "responsible person" of Focus who had willfully failed to pay the company's taxes. Prior to the issuance of the proposed assessment, in May 1994, Pottle filed with the IRS a statement in which he averred that he and George were the only persons with authority over Focus' finances. Pottle failed to mention that, during much of the relevant period, Paul had been authorized to disburse, and had in fact disbursed, money from Focus' bank accounts. Paul appealed the proposed assessment to the IRS Office of Appeals on January 12, 1995. On June 28, 1996, the Office of Appeals rejected Paul's challenge.

On August 12, 1996, the IRS assessed a penalty against Paul in the amount of $31,825.66 for Focus' tax liabilities for the first three quarters of 1992, the period from January 1, 1992 to September 30 1992. The IRS made a like assessment against George. Paul and George, on November 16, 1999, each paid the IRS $84.00 and filed refund claims with the agency. The claims were denied, and on June 30, 2000, Paul and George sued the IRS in district court for refunds of the sums paid and an abatement of the balance of the assessment. In response, the government filed counterclaims against Paul and George for the portion of the assessment that remained unpaid.⁴

During discovery, Pottle and Paul were deposed.⁵ At his deposition, Paul stated that he had the authority to write checks to pay Focus' smaller bills, "certainly [invoices] under $100, for example," without first obtaining approval from Pottle or George. However, he said that he did not have the authority to pay Focus'"larger invoices — telephone bills, for example," without obtaining prior approval. Paul testified that there were no "specific ... criteria that [were] employed [to distinguish the smaller bills from the larger ones]."

In addition, Paul acknowledged that once Focus began experiencing financial difficulties, he participated in daily meetings with Pottle and George during which Focus' financial obligations were discussed and it was decided which bills were to be paid.⁶ The extent of Paul's involvement in the meetings and in the ultimate decision as to which creditors were to be paid is unclear from the deposition transcript. Paul also admitted that, in 1992, he was aware that Focus had not paid its taxes but that it was paying its employees' salaries and other obligations.

Pottle testified at his deposition that Paul lacked the authority to make independent spending decisions. But, Pottle also stated that, at all relevant times, George was responsible for the day-to-day operations of the company's business in Plymouth. And, Pottle said that he rarely visited the Plymouth office after the first few years of Focus' existence.

Following the close of discovery, Paul filed a motion for summary judgment in which he asserted that the undisputed facts established that he was not a person responsible for the payment of taxes by Focus because he never had the authority to decide which of Focus' creditors were to be paid. At the same time, Paul filed an affidavit in which he maintained that he was nothing more than a clerical employee of Focus; he insisted that he: (1) "did not have the authority ... to determine which creditors were to be paid"; (2) "was not an officer, shareholder or director"; (3) "was controlled by [] Pottle"; (4) "did not have the actual ability to establish financial policies or procedures"; and (5) "did not have the ability to hire or fire employees."

The government opposed the motion, arguing that the scope of Paul's authority to determine which of Focus' creditors were to be paid was in dispute. The government pointed out that, at his deposition, Paul testified that he had the authority to pay certain creditors without prior approval and participated in daily meetings with Pottle and George concerning Focus' financial obligations.

The district court allowed the motion in part and denied it in part. It concluded that, for the period from January 1, 1992 through August 1, 1992 (the first, the second, and part of the third quarter), there was a genuine dispute as to whether Paul had the requisite decision-making authority to render him a person responsible for payment of taxes by Focus. By contrast, it reasoned that Paul's relinquishment of his check-signing authority on August 2, 1992 left him in a position where, after that date, he clearly lacked authority to pay taxes. Therefore, the district court allowed the motion as to the period from August 2, 1992 through September 30, 1992 and denied it as to the period from January 1, 1992 through August 1, 1992.

After the close of evidence at trial, Paul filed a motion for a directed verdict, which the district court allowed. Paul then moved for administrative and litigation costs under 26 U.S.C. § 7430. The government opposed the motion, claiming that it was substantially justified in taking the position that Paul was liable for Focus' tax deficiencies. The district court agreed with the government and denied the motion. Paul now seeks review of that denial.

II. Discussion

We have not previously addressed the question of what standard of review applies to a district court's ruling on a motion for costs pursuant to 26 U.S.C. § 7430. We will follow our sister circuits and review the district court's determination that Paul was not entitled to costs under § 7430 for abuse of discretion. See, e.g., United States v. Bisbee, 245 F.3d 1001, 1007 (8th Cir.2001); Wilkerson v. United States, 67 F.3d 112, 119 (5th Cir.1995); Cooper v. United States, 60 F.3d 1529, 1531 (11th Cir.1995); Awmiller v. United States, 1 F.3d 930, 930 (9th Cir.1993); Wilfong v. United States, 991 F.2d 359, 364 (7th Cir.1993); Pate v. United States, 982 F.2d 457, 459 (10th Cir.1993).

A. Statutory Framework

At the outset, we review the statutory framework relevant to this appeal.

1. 26 U.S.C. §§ 3102, 3402, 6672

The Internal Revenue Code requires employers to withhold federal income taxes from their employees' wages. Slodov v. United States, 436 U.S. 238, 242-43, 98 S.Ct. 1778, 56 L.Ed.2d 251 (1978); see 26 U.S.C. §§ 3102(a), 3402(a). The withheld sums are to be paid to the IRS on a quarterly basis. Slodov, 436 U.S. at 243, 98 S.Ct. 1778. "An employer who fails to pay taxes withheld from its employees' wages is ... liable for the [unpaid] taxes...." Id. Moreover, 26 U.S.C. § 6672(a) extends liability for unpaid taxes by providing:

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...