Thomsen v. U.S., 89-1130

• Decision Date: 07 June 1989
• Docket Number: No. 89-1130,89-1130
• Citation: 887 F.2d 12
• Parties: -5752, 89-2 USTC P 9575, Unempl.Ins.Rep. CCH 14938A Edgar B. THOMSEN, Jr., Plaintiff, Appellant, v. UNITED STATES of America, Defendant, Appellee. . Heard
• Court: U.S. Court of Appeals — First Circuit

Page 12

887 F.2d 12

64 A.F.T.R.2d 89-5752, 89-2 USTC P 9575,

Unempl.Ins.Rep. CCH 14938A

Edgar B. THOMSEN, Jr., Plaintiff, Appellant, v. UNITED STATES of America, Defendant, Appellee.

No. 89-1130.

United States Court of Appeals, First Circuit.

Heard June 7, 1989.

Decided Sept. 29, 1989.

James E. Purcell, with whom Partridge, Snow & Hahn, Providence, R.I., was on brief for plaintiff, appellant.

James H. Love, Tax Div., Dept. of Justice, with whom James I.K. Knapp, Acting Asst. Atty. Gen., Pomona, Cal., Lincoln C. Almond, U.S. Atty., Providence, R.I., Gary R. Allen and William S. Estabrook, Tax Div., Dept. of Justice, Washington, D.C., were on brief for the U.S.

Before CAMPBELL, Chief Judge, and REINHARDT ^* and TORRUELLA, Circuit Judges.

LEVIN H. CAMPBELL, Chief Judge.

On December 22, 1986, the Internal Revenue Service assessed a penalty under section 6672 of the Internal Revenue Code against plaintiff-appellant Edgar B. Thomsen, Jr. for unpaid federal employment taxes withheld from the wages of employees of C & K Restaurant Supply, Inc. ("C & K") for the second, third, and fourth quarters of 1984. On February 26, 1987, Thomsen paid to the IRS under protest the sum of $13,644.11 representing the amount of the assessment plus accrued interest. Thereafter, Thomsen brought an action in the United States District Court for the District of Rhode Island challenging the assessment and seeking to recover what he had paid. A jury trial was held, and after plaintiff had presented his evidence and rested, the district court granted the government's motion for a directed verdict. This appeal followed.

I.

The Internal Revenue Code requires employers to withhold federal income taxes from employees' wages, 26 U.S.C. Secs. 3102, 3402 (1986), and to hold such amounts in trust for the United States. 26 U.S.C. Sec. 7501 (1986). The employer must report the amount of taxes withheld quarterly, and is liable for them from the time the wages are paid. The Internal Revenue Service ("IRS") has no recourse against employees once their employers have withheld income taxes from their wages. The Code, however, imposes personal liability not only upon employers but upon their officers and agents who are responsible for collecting, accounting for, and paying over to the government the taxes withheld. 26 U.S.C. Sec. 6672 (1986) provides,

Sec. 6672. Failure to collect and pay over tax, or attempt to evade or defeat tax

(a) General rule.--Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to ... pay over such tax, ... 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.

To be liable under this section, a person must (1) be a "responsible person": i.e., one who is required to collect, account for, and pay over the taxes; and (2) act "willfully" within the meaning of the section. 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 (1978); Harrington v. United States, 504 F.2d 1306, 1311 (1st Cir.1974); Maggy v. United States, 560 F.2d 1372, 1374-75 (9th Cir.1977), cert. denied, 439 U.S. 821, 99 S.Ct. 86, 58 L.Ed.2d 112. The issue here is whether, on the evidence at the close of plaintiff's case, the district court properly directed a verdict in favor of the government.

II.

We state the facts in a version that is most favorable to Thomsen. Thomsen was the Vice-President of E.B. Thomsen, Inc., a family-owned Rhode Island corporation with its principal place of business in Central Falls, Rhode Island, engaged in the business of selling restaurant supplies such as paper goods, juices, and glassware. In April of 1983, E.B. Thomsen, Inc. started to sell restaurant supplies in Connecticut and found from time to time that it was competing with C & K Distributors, which was operated by a man named Dennis Shortell. Shortell and Thomsen discussed the possibility of combining operations, which they subsequently did by forming a new corporation called C & K Restaurant Supply in August of 1983. At all times during its existence, C & K's stock was owned 25 percent by Shortell's brother, Thomas Shortell; 25 percent by Shortell's wife; and 50 percent by E.B. Thomsen, Inc. The officers of C & K at all times during its operations were Susan Mirabile (Thomsen's sister), President; Dennis Shortell, Vice-President; Thomas Shortell, Secretary; and Thomsen, Treasurer. Both the office and the warehouse of C & K were located in Kensington, Connecticut, and the banks that C & K used were Connecticut banks. At the beginning of C & K's operations, there were approximately eight to nine employees, several of whom also worked for two other companies owned by Dennis Shortell and located at the same address.

During the start-up of operations of C & K in the Fall of 1983, Thomsen visited the premises two to three times a week and assisted in operational matters and sales. Susan Mirabile set up an accounting ledger system for C & K and instructed the bookkeeper in its use, visiting weekly until December of 1983 when she went on maternity leave.

From the beginning, Thomsen and Shortell divided responsibilities. Shortell was responsible for day-to-day operations, handling of funds, payment of bills, and on-site management. E.B. Thomsen supplied purchasing power and products. As Treasurer of C & K, Thomsen was not assigned nor did he actually undertake any duties involving the handling of funds, payment of bills, writing of checks, disbursing of payroll, withholding or payment of taxes, or any other financial matters of C & K. Thomsen had authority to sign checks of C & K, but signed at the most four checks during the beginning of operations and none during the period from April 1, 1984 until the close of C & K's business in January 1985--the period for which withholding taxes were not paid. Thomsen testified that he was never involved in any manner with the payment of C & K's taxes, with its books and records, nor with the determination of what creditors of C & K would be paid and when.

In January or February of 1984, E.B. Thomsen, Inc. entered into negotiations resulting in the purchase of a business in Pawtucket, Rhode Island, which acquisition required a major commitment of time from Thomsen and precluded his continued involvement with C & K. It was agreed between the two partners that Shortell would purchase E.B. Thomsen, Inc.'s 50 percent ownership interest in C & K; and Thomsen told Shortell that as of April 1, 1984, he would no longer be involved in the business of C & K. At this point, Thomsen's involvement and responsibility with C & K's business diminished rapidly, eventually coming to an effective halt. The agreement by Shortell to acquire ownership of E.B. Thomsen, Inc.'s shares of C & K never materialized.

The withholding taxes in question were for the period from April 1, 1984 through December 31, 1984 (the last three quarters of 1984)--the period after Thomsen had effectively withdrawn from the business. Forms 941 for each of these three quarters were signed by Shortell and filed with the IRS, but no deposit of the federal tax monies was ever made.

During the period after April 1, 1984, a number of checks made out by C & K to E.B. Thomsen, Inc. in payment for supplies purchased from E.B. Thomsen bounced. Shortell explained to Thomsen or Susan Mirabile on each occasion that the cause was a cash flow problem due to defects in his computer program, and that E.B. Thomsen, Inc. should resubmit the checks for payment. The resubmitted checks sometimes cleared and sometimes bounced a second time. Shortell continued to tell Thomsen that business was prospering: he was hiring new people, getting new contracts, and so forth. As a result, Thomsen assumed payments were being made to all other creditors, and that Shortell was merely exploiting his business relationship with Thomsen by always paying E.B. Thomsen, Inc. last. At one point in December, however, Thomsen told Shortell that he would refuse to ship any more supplies unless he would be paid for them. When C & K's check again bounced twice after a solemn promise by Shortell that the goods would be paid for, Thomsen visited the premises of C & K on January 5, 1985 to investigate. He then discovered for the first time that C & K was in a shambles financially, that other creditors had not been paid either, that the federal employee withholding taxes for the previous three quarters had not been paid, and that there was no cash available to pay the taxes. Thomsen made the decision at that point, with Shortell's concurrence, that the business was no longer viable and that the company should be closed permanently. Shortell volunteered to collect the receivables, promising Thomsen at Thomsen's insistence that the unpaid taxes would be satisfied from the proceeds as a first priority. Thomsen agreed to assign this responsibility to Shortell since Shortell was located in Connecticut, knew most of the customers personally, and would be in a much better position to collect the receivables than Thomsen. C & K's assets at this time included inventory on hand (some of which represented goods E.B. Thomsen, Inc. had shipped just a short time before on Shortell's assurance of full payment) and accounts receivable amounting to $55,000. A week or so later, Thomsen returned to C & K's office with a truck and took possession of the inventory on hand. Thomsen then liquidated the saleable portion of the goods through E.B. Thomsen, Inc., realizing $4,000-$5,000 as a result. He also took with him many of C & K's records and books but not the company checkbook. After returning to Rhode Island, he asked Shortell by telephone and letter for an accounting on several occasions, but never received one. At one point, he wrote a letter to C & K's attorney, requesting him to pay C & K's...