Mahler v. U.S., CIV.A. 3:95 CV 2732(SRU).

• Decision Date: 30 September 2000
• Docket Number: No. CIV.A. 3:95 CV 2732(SRU).,Nos. 3:96 CV271(SRU) through 3:96 CV273(SRU).,CIV.A. 3:95 CV 2732(SRU).,s. 3:96 CV271(SRU) through 3:96 CV273(SRU).
• Court: U.S. District Court — District of Connecticut
• Parties: William MAHLER, et al. v. UNITED STATES of America

121 F.Supp.2d 179

William MAHLER, et al. v. UNITED STATES of America

No. CIV.A. 3:95 CV 2732(SRU).

Nos. 3:96 CV271(SRU) through 3:96 CV273(SRU).

United States District Court, D. Connecticut.

September 30, 2000.

COPYRIGHT MATERIAL OMITTED

J. Michael Sulzbach, New Haven, CT, William M. Bloss, Jacobs, Grudberg, Belt & Dow, P.C., New Haven, CT, Edwin L. Doernbergerr, New Haven, CT, for Plaintiffs.

William A. Collier, Thomas V. Daily, U.S. Atty's Office, Hartford, CT, John V. Cardone, Fatina N. Purdie, U.S. Dept. of Justice Tax Division, for Defendants.

MEMORANDUM OF DECISION

UNDERHILL, District Judge.

The plaintiffs, Russell Mahler, Sr. ("Russell Senior"), Stelle Mahler ("Stelle") Russell Mahler, Jr. ("Russell Junior") and William Mahler ("William") each commenced an action, now consolidated, to obtain refunds of money they had paid in partial satisfaction of federal tax assessments and liens levied against them. These assessments were made as one hundred percent penalties pursuant to the provisions of Section 6672 of the Internal Revenue Code, on the grounds that the plaintiffs had willfully failed to remit certain withholding and Federal Insurance Contributions Act ("FICA") taxes due and owing from them for the employees of their family business, Nutmeg Farms, Inc. ("Nutmeg"). The United States responded to the actions by asserting counterclaims, pursuant to Section 7401 of the Internal Revenue Code, for judgments against the plaintiffs in the amount of the assessed balance due. This decision follows a bench trial on November 30, December 1 and December 22, 1999, and constitutes the court's findings of fact and conclusions of law pursuant to Rule 52(a) of the Federal Rules of Civil Procedure.

Introduction

Sections 3102(a) and 3402(a) of the Internal Revenue Code require employers to deduct and withhold federal income and social security taxes from their employees' wages. These withheld sums are held "in trust for the United States," 26 U.S.C. § 7501(a), and must be paid over to the government on a quarterly basis. See Slodov v. United States, 436 U.S. 238, 243, 98 S.Ct. 1778, 56 L.Ed.2d 251 (1978). Such "trust fund taxes" are held for the exclusive use of the United States and are not to be used to pay the employer's business expenses, salaries, or for any other purpose. Kalb v. United States, 505 F.2d 506, 510 (2d Cir.1974), cert. denied, 421 U.S. 979, 95 S.Ct. 1981, 44 L.Ed.2d 471 (1975); see also 26 U.S.C. §§ 3102(b), 3403, 7501(a).

Once the federal income and social security taxes are withheld from the employees' wages, the employees are given credit for the payment and the United States is required to credit the amount withheld against the employees' individual income tax liabilities. 26 U.S.C. § 31(a); Treas. Reg. § 1.31-1(a). Accordingly, once an employer withholds taxes, the government has no recourse against the employees, even when the employer does not turn over to the United States the withheld amounts. Fiataruolo v. United States, 8 F.3d 930, 938 (2d Cir.1993); Bowlen v. United States, 956 F.2d 723, 726 (7th Cir.1992). The United States therefore suffers a loss of revenue when the trust fund taxes are not remitted by the employer. See Slodov, 436 U.S. at 243, 98 S.Ct. 1778; Fiataruolo, 8 F.3d at 938.

To protect the government from losses sustained by an employer's failure to remit withholding taxes, Congress enacted Section 6672 of the Internal Revenue Code. 26 U.S.C. § 6672. Section 6672 gives the Internal Revenue Service ("IRS") another source from which to collect the unpaid taxes, Fiataruolo, 8 F.3d at 938; Gephart v. United States, 818 F.2d 469, 473 (6th Cir.1987) (per curiam), by providing "a mechanism for shifting the tax liability of the employer to each individual responsible for the nonpayment." Fiataruolo, 8 F.3d at 938, citing Edward A. Nolfi, Annotation, When Are Persons Other than Owners, Directors, Officers and Employees Potentially Liable for Penalties Under IRC § 6672 (26 USCS § 6672), Concerning Failure to Collect and Pay Over Tax, 84 A.L.R. Fed. 170, 177 (1987). Section 6672 is therefore "a vital collection tool that cuts through an employer's organizational structure and allows the IRS to impose liability directly and individually on those persons responsible for the tax delinquency." Fiataruolo, 8 F.3d at 938; Godfrey v. United States, 748 F.2d 1568, 1574 (Fed.Cir.1984).

In pertinent part, Section 6672 provides that "[a]ny person required to collect, truthfully account for, and pay over any tax imposed by this title who wilfully 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. § 6672(a).¹

Requirements of Section 6672

Under Section 6672, an individual may be held liable for unpaid withholding taxes if: (1) he or she is a "responsible person" for collection and payment of the employer's trust fund withholding taxes, see United States v. McCombs, 30 F.3d 310, 317 (2d Cir.1994); Fiataruolo, 8 F.3d at 938; Godfrey, 748 F.2d at 1574 & n. 4; and (2) he or she "willfully" failed to comply with the statute. McCombs, 30 F.3d at 317; Fiataruolo, 8 F.3d at 938; Hochstein v. United States, 900 F.2d 543, 546 (2d Cir.1990), cert. denied, 504 U.S. 985, 112 S.Ct. 2967, 119 L.Ed.2d 587 (1992). It is well settled that an IRS assessment under section 6672 is presumptively correct, however, and the person against whom the IRS assesses a Section 6672 tax penalty has the burden of disproving, by a preponderance of the evidence, the existence of one of these two elements. McCombs, 30 F.3d at 318 ("In the context of section 6672, however, courts have extended the presumption of correctness not merely to the amount of the assessment itself but also to the existence of the two elements, responsibility and willfulness, that underlie the imposition of this type of tax liability"); see also United States v. Rem, 38 F.3d 634, 643 (2d Cir.1994); Fiataruolo, 8 F.3d at 938; Hochstein, 900 F.2d at 546 (taxpayer "bears the burden of proving by a preponderance of the evidence that one or both of these elements [willfulness and responsibility] is not present"); Lesser v. United States, 368 F.2d 306, 310 (2d Cir.1966) (en banc); United States v. Lease, 346 F.2d 696, 701 (2d Cir.1965); Rizzuto v. United States, 889 F.Supp. 698, 704 (S.D.N.Y. 1995) (burden of proof is on the taxpayer; IRS is presumed to be correct); Skouras v. United States, 854 F.Supp. 962, 971 (S.D.N.Y.1993) (tax assessment pursuant to section 6672 creates a prima facie case of liability).

Responsible Person

With respect to the first prong of the test, "courts generally take a broad view of who qualifies as a responsible person." Rem, 38 F.3d at 642; see also Fiataruolo, 8 F.3d at 938-39; Denbo v. United States, 988 F.2d 1029, 1032 (10th Cir.1993); Barnett v. IRS, 988 F.2d 1449, 1454 (5th Cir. 1993). Thus, "determination of responsibility is based upon the individual's `status, duty and authority' to insure compliance with the employer's tax withholding obligations," Fiataruolo, 8 F.3d at 939; Barton v. United States, 988 F.2d 58, 59 (8th Cir.1993); Raba v. United States, 977 F.2d 941, 943 (5th Cir.1992), and the "core question `is whether the individual has significant control over the enterprise's finances.'" Fiataruolo, 8 F.3d at 939, citing Hochstein, 900 F.2d at 547 (emphasis added); see also McCombs, 30 F.3d at 319.

A person does not have to be a shareholder, a director, or an officer of a corporation to be responsible under the statute. Hochstein, 900 F.2d at 545; Caterino, 794 F.2d 1, 6 & n. 1 (1st Cir.1986); In re Bourque, 153 B.R. 87 (Bankr. D.Mass.1993); Hanshaw v. United States, 94 B.R. 753 (Bankr.M.D.Fla.1988). Moreover, in the Second Circuit, liability as a responsible person under Section 6672 is predicated upon the existence of significant, as opposed to absolute, control of the corporation's finances. See Fiataruolo, 8 F.3d at 939 ("[T]his need for a responsible party to have significant control does not, at least in this Circuit, translate into a requirement of absolute authority."); see also Hochstein, 900 F.2d at 547. Rather, the term "significant control" encompasses "all those connected closely enough with the business to prevent the [tax] default from occurring." Fiataruolo, 8 F.3d at 939; Bowlen, 956 F.2d at 728. Thus, to be held responsible under Section 6672, the person need not have the final word on which creditors are to be paid or how funds are to be allocated. Fiataruolo, 8 F.3d at 939; Barton v. United States, 988 F.2d 58, 59 (8th Cir.1993).

Significant control may also be shared by several people within a company, all of whom may be found liable for a withholding tax delinquency. See Rem, 38 F.3d at 642; Fiataruolo, 8 F.3d at 939; Kinnie v. United States, 994 F.2d 279, 283 (6th Cir.1993); Roth v. United States, 567 F.Supp. 496, 498-99 (E.D.N.Y.1983), aff'd, 742 F.2d 1434 (2d Cir.1984). One need not be the "most responsible" person to be liable under Section 6672, Hochstein, 900 F.2d at 547; Gephart, 818 F.2d at 476, and need not have day-to-day control over corporate affairs. See Purcell v. United States, 1 F.3d 932, 937 (9th Cir.1993) (even if "an individual's day-to-day function in a given enterprise is unconnected to financial decisionmaking or tax matters" he is still responsible as long as he has "the authority to pay or to order the payment of delinquent taxes"); Rizzuto v. United States, 889 F.Supp. 698, 704 (S.D.N.Y. 1995).

Moreover, the authority to pay or order the payment of delinquent taxes may not be delegated to others in order to avoid liability. Fiataruolo, 8 F.3d at 939; Hornsby v. IRS, 588 F.2d 952, 953-54 (5th Cir.1979); see also Rizzuto, 889 F.Supp. at 704 ("A responsible person cannot absolve himself of liability...