Schwinger v. US, 82 CV 1256.

• Decision Date: 23 January 1987
• Docket Number: No. 82 CV 1256.,82 CV 1256.
• Citation: 652 F. Supp. 464
• Parties: Harold SCHWINGER, Plaintiff, v. UNITED STATES of America, Defendant, v. Lester RUBIN, Counterclaim-Defendant.
• Court: U.S. District Court — Eastern District of New York

652 F. Supp. 464

Harold SCHWINGER, Plaintiff, v. UNITED STATES of America, Defendant, v. Lester RUBIN, Counterclaim-Defendant.

No. 82 CV 1256.

United States District Court, E.D. New York.

January 23, 1987.

Norman R. Berkowitz, New York City, for plaintiff.

Richard M. Prendergast, Trial Atty., Tax Div., U.S. Dep't of Justice, Washington, D.C., for defendant.

MEMORANDUM AND ORDER

McLAUGHLIN, District Judge.

This civil tax case arises out of the operation of a hospital that filed a petition in bankruptcy on January 29, 1975. Dr. Harold Schwinger was the director of radiology and a member of the medical board of the Brooklyn Womens Hospital, Inc. He also sat on the Board of Trustees, served as its secretary, and was a member of its executive committee. During the second, third and fourth quarters of 1973, the fourth quarter of 1974 and the first quarter of 1975, the Hospital failed to remit to the United States the income and social security tax amounts it had withheld from its employees' paychecks. On September 21, 1981, the Secretary of the Treasury made an assessment of $295,337.30 — the amount of the unpaid withholding taxes — against Schwinger. It acted pursuant to 26 U.S.C. § 6672, which provides, in relevant part:

(a) General Rule — 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.

Plaintiff paid part of the amount assessed, and then commenced this proceeding to challenge his liability for the penalty. The United States filed a counterclaim for the unpaid balance.¹

The Internal Revenue Code of 1954 requires employers to deduct social security and income taxes from wages paid to employees. See 26 U.S.C. § 3102(a) (social security tax); id. § 3402(a) (income tax). The deducted amounts, which are withheld from paychecks, are held by the employer as a special trust fund for the benefit of the United States, see id. § 7501, and must be paid to the government on a quarterly basis, see 26 C.F.R. § 31.6011(a)-4.

If the employer fails to make the required payments, section 6672 provides an alternative method for collecting the withheld taxes: the government may assess a penalty, equal to the full amount of the unpaid tax, against a person responsible for paying over the money who willfully fails to do so. The penalty provision reflects a congressional judgment that because amounts withheld from employee salaries are "treated as a trust fund ... persons responsible for their paying over should be individually liable, as well as the corporation, for their diversion." Spivak v. United States, 370 F.2d 612, 615 (2d Cir.), cert. denied, 387 U.S. 908, 87 S.Ct. 1690, 18 L.Ed.2d 625 (1967). The assessment of the tax creates a prima facie case of liability, see Lesser v. United States, 368 F.2d 306, 310 (2d Cir.1966), and the person against whom the penalty is levied bears the burden of establishing by a preponderance of the evidence that at least one of the two elements of section 6672 liability does not exist, see id.

The two requirements are: 1) that the plaintiff was under a duty to collect, account for, and pay over the taxes; and 2) that plaintiff's failure to do these things was willful. Both parties seek summary judgment on both issues. Plaintiff also seeks an award of costs.

I. Section 6672

A. "Responsible Person"

A "responsible person" in the context of withholding tax payment liability is one "with power and responsibility within the corporate structure for seeing that the withheld taxes ... are remitted to the Government.... This duty is generally found in high corporate officials charged with general control over corporate business affairs who participate in decisions concerning payment of creditors and disbursal of funds." Monday v. United States, 421 F.2d 1210, 1214-15 (7th Cir.) (citations omitted), cert. denied, 400 U.S. 821, 91 S.Ct. 38, 27 L.Ed.2d 48 (1970). "Day to day control is ... unnecessary for a finding of responsibility," Copperman v. United States, 78-2 U.S.T.C. ¶ 9579, at 84,861 (E.D.N.Y.1978), but "`"duty" under § 6672 must be viewed in light of his power to compel or prohibit the allocation of corporate funds,'" Pototzky v. United States, 8 Cl.Ct. 308, 85-1 U.S. T.C. ¶ 9438, at 88,212 (1985) (quoting Godfrey v. United States, 748 F.2d 1568, 1576 (Fed.Cir.1984)). Responsibility has been described as depending on "whether the person had control of the disbursements of the taxpayer, that is, whether `he had the final word as to what bills should or should not be paid and when,'" Anderson v. United States, 561 F.2d 162, 165 (8th Cir.1977) (quoting Wilson v. United States, 250 F.2d 312, 316 (9th Cir.1958)), but "final" in this context indicates significant rather than exclusive control, Alioto v. United States, 593 F.Supp. 1402, 1408 (N.D.Cal.1984); see Totaro v. United States, 533 F.Supp. 71, 73 (W.D.N.Y.1981), aff'd, 697 F.2d 298 (2d Cir. 1982).

The critical consideration is whether there exists a sufficient nexus between the plaintiff and the delinquent corporation's financial operation to warrant a finding that the plaintiff participated in decisions concerning the payment of creditors and disbursal of funds and thus had authority to determine whether the United States or other creditors would be paid.

Gold v. United States, 506 F.Supp. 473, 478 (E.D.N.Y.) (citations omitted), aff'd, 671 F.2d 492 (2d Cir.1981).

The ... following specific facts may be relied upon in determining whether persons are responsible for payment of taxes withheld from wages of employees: (1) identity of officers, directors and shareholders of the corporation; (2) duties of the officer as outlined by the corporate by-laws; (3) ability of the individual to sign checks of the corporation; (4) identity of the individuals who were in control of the financial affairs of the corporation; (5) identity of the individuals who hired and fired employees.

Silberberg v. United States, 524 F.Supp. 744, 747 (E.D.N.Y.1981).

It is undisputed in this case that Schwinger held positions on several entities responsible for managing the hospital. The holding of corporate office alone, however, does not make an individual a "responsible person." See Pototzky, supra, 8 Cl.Ct. 315, 85-1 U.S.T.C. at 88,211; see also In the Matter of Brahm, 52 B.R. 606, 85-2 U.S.T.C. ¶ 9708 at 89,923 (M.D.Fla.1985) (corporate president not a "responsible person"). Similarly, the authority to sign checks on behalf of the employer, "without more, is a weak pillar on which to rest a liability determination ..." Barrett v. United States, 580 F.2d 449, 453 (Ct.Cl. 1978).

Moreover, the government concedes, for purposes of its motion, that Schwinger did not actually sign any hospital checks and did not participate in the preparation, review or signing of the hospital's payroll tax returns or computations.

In these circumstances the Court cannot hold as a matter of law that plaintiff was a "responsible person" within the meaning of section 6672. It is unclear on the record before me the extent to which membership on the various boards and committees on which he served conferred on plaintiff the authority to manage the affairs of the hospital. The inference that the government would have the Court draw as a matter of law — that plaintiff's corporate offices and functions render him a "responsible person" — may be warranted as a matter of fact. In light, however, of plaintiff's contention that he had no involvement in the hospital's financial affairs and no input into decisions as to which creditors were to be paid, further development of the record is warranted, and summary judgment for the government on this issue is improper.

On the other hand, however, there is no absence of material fact issues such that summary judgment for plaintiff would be warranted. It must be noted at the outset that plaintiff's lack of participation in the preparation of tax and payroll documents and the signing of checks is conceded by the government only for purposes of its motion. Thus, on defendant's motion for summary judgment, fact issues exist as to the extent, if any, of plaintiff's involvement in tax and payroll matters.

Moreover, even if it were agreed that plaintiff did not participate in the preparation of documents, substantial fact questions remain as to his involvement in spending decisions. It is undisputed that he served as secretary of the Board of Directors and sat on its executive committee. It is also undisputed that these bodies were charged with general responsibility for running the hospital and managing its business, and that they in fact addressed various issues arising from the hospital's financial difficulties. With so obvious a connection to the main decisionmaking units of the corporation, plaintiff clearly cannot, at least at this stage of the litigation, be said to have had no "`responsibility and authority to avoid the default which constitutes a violation'" of section 6672. Bolding v. United States, 565 F.2d 663, 671 (Ct.Cl. 1977) (quoting Scott v. United States, 354 F.2d 292, 296 (Ct.Cl.1965)). There is a gap in the record before me as to who actually conducted the hospital's financial affairs and did the hiring and firing. Accordingly, further factfinding is in order to determine whether plaintiff was a "responsible person" in the context of payroll tax withholding obligations. Thus, because genuine issues of material fact remain to be decided, plaintiff's and defendant's motions for summary judgment on the issue of responsibility are denied.

B. Willfullness

Assuming for purposes of this discussion that plaintiff is a responsible...