U.S. v. Carrigan, 93-5687

• Decision Date: 12 August 1994
• Docket Number: No. 93-5687,93-5687
• Parties: -5425, 94-2 USTC P 50,375, Unempl.Ins.Rep. (CCH) P 14029B UNITED STATES of America v. Robert P. CARRIGAN, David L. Fendrick and Edward M. Sullivan Edward M. Sullivan, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

Page 130

31 F.3d 130

74 A.F.T.R.2d 94-5425, 94-2 USTC P 50,375,

Unempl.Ins.Rep. (CCH) P 14029B

UNITED STATES of America v. Robert P. CARRIGAN, David L. Fendrick and Edward M. Sullivan Edward M. Sullivan, Appellant.

No. 93-5687.

United States Court of Appeals Third Circuit.

Argued May 5, 1994.

Decided July 18, 1994.

Sur Petition for Rehearing Aug. 12, 1994.

Gary R. Allen, Jonathan S. Cohen, Marion E.M. Erickson (argued), U.S. Dept. of Justice Tax Div., Washington, DC, for appellee.

Robert H. Louis, Howard M. Soloman (argued), Abrahams, Loewenstein, Bushman & Kauffman, Philadelphia, PA, for appellant.

Before: SLOVITER, Chief Judge, HUTCHINSON, Circuit Judge, and DIAMOND, District Judge. ^*

OPINION OF THE COURT

DIAMOND, District Judge.

Edward M. Sullivan ("Sullivan") appeals an order of the United States District Court for the District of New Jersey granting summary judgment in favor of the United States and denying his motion for summary judgment. Specifically, the district court upheld the Internal Revenue Service's ("IRS") assessment of a 100% penalty against Sullivan pursuant to Sec. 6672 of the Internal Revenue Code on grounds that he was a responsible person who willfully failed to pay over federal

employment taxes. Because we believe that the record before us does not establish Sullivan's liability as a matter of law, we will reverse and remand for a trial on the merits.

I. Background Facts ¹

In September 1984, Sullivan began working as president of Pat's International, Ltd. ("Pat's"), a company which operated fast food restaurants specializing in Philadelphia-style cheesesteaks. Sullivan was hired by Robert P. Carrigan ("Carrigan"), chairman of the board of directors and chief executive officer of Pat's. Pursuant to his designation as president, Sullivan was responsible for (1) assisting Carrigan in raising capital for Pat's by meeting with potential investors; (2) managing restaurant operations; and (3) locating new restaurant sites. Sullivan also was authorized to sign checks drawn from the company's payroll and general operating accounts.

In February or March 1985, Sullivan first became aware that Pat's was not current in its payment of quarterly employment taxes to the United States. ² During this same time period, Sullivan loaned Pat's $20,000.00, at the request of Carrigan, so that it could pay its creditors, including the IRS. Sullivan took no steps, however, to ensure that the $20,000.00 was applied to the tax liability, even though he knew that other creditors were being paid ahead of the United States. Sullivan was removed as president of Pat's in August 1985, and left the company the following month.

In April 1989, the IRS made an assessment against Sullivan in the amount of $83,060.78 pursuant to 26 U.S.C.A. Sec. 6672. ³ The IRS charged that Sullivan willfully failed to account for and pay over to the United States federal employment taxes withheld from the wages of Pat's employees during the three quarters ending March 31, 1985, June 30, 1985, and September 30, 1985. ⁴

In October 1992, the United States filed a complaint in the district court seeking to reduce to judgment the assessments that had been made against Sullivan, Carrigan, and Fendrick pursuant to Sec. 6672. ⁵ Thereafter, Sullivan filed an answer seeking dismissal of the complaint against him for failure to state a claim upon which relief could be granted, and also filed a counterclaim seeking a refund of $100.00 paid on account of the penalty assessed against him. ⁶ Upon consideration of cross-motions for summary judgment, the district court found that "[a]lthough Sullivan may not have always had the 'final' say about paying creditors, in the apocalyptic sense of the word," he was a responsible person under Sec. 6672 because (1) he had signature authority on the payroll and general operating accounts, which he exercised at least once in making a tax payment to the The district court had jurisdiction over the parties' claims by virtue of 28 U.S.C.A. Secs. 1340, 1345, and 1355 and 26 U.S.C.A. Secs. 7401 and 7402. We have jurisdiction over the appeal pursuant to 28 U.S.C.A. Sec. 1291.

IRS; (2) he was president of Pat's; (3) he devoted significant time to raising capital for the company; and (4) he loaned the company $20,000.00 to pay creditors. Further, the district court found that Sullivan willfully failed to pay over the withholding taxes because he was aware of the unpaid tax liability and that other creditors were being paid ahead of the IRS, yet failed to exercise his authority to ensure that the taxes were paid, either with the $20,000.00 that he personally loaned to Pat's or from the existing balances in the company's accounts on which he had signature authority. ⁷

In reviewing the district court's grant of summary judgment we exercise plenary review and employ the same standard applicable in the district court. Davis v. Portline Transportes Maritime, 16 F.3d 532, 536 (3d Cir.1994). We must consider all of the facts and inferences in the light most favorable to the nonmoving party. The moving party can prevail in its motion for summary judgment only if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Peters v. Delaware River Port Authority, 16 F.3d 1346, 1349 (3d Cir.1994).

II. Discussion

The question of Sullivan's liability under Sec. 6672 presents two issues: whether Sullivan is a responsible person and whether he willfully failed to collect, truthfully account for or pay over federal employment taxes. As we have extensively discussed the standards for addressing these two issues before, we will only summarize their salient points. We will first address the responsible person issue.

A.

A person responsible under Sec. 6672 is a person required to collect, truthfully account for or pay over any tax due to the United States. Brounstein v. United States, 979 F.2d 952, 954 (3d Cir.1992). "Responsibility is a matter of status, duty, or authority, not knowledge." Quattrone Accountants, Inc. v. IRS, 895 F.2d 921, 927 (3d Cir.1990). A responsible person need not have exclusive control over the company's finances, he need only have significant control. United States v. Vespe, 868 F.2d 1328, 1332 (3d Cir.1989). "A person has significant control if he has the final or significant word over which bills or creditors get paid." Quattrone, 895 F.2d at 927. In determining whether an individual is a responsible person, courts also consider other factors. These include: (1) the duties of the officer as outlined by the corporate by-laws; (2) the ability of the individual to sign checks of the corporation; (3) the taxpayer's signature on the employer's federal employment or other tax returns; (4) the identity of the officers, directors and shareholders of the corporation; (5) the identity of the individuals who hired and fired employees; and (6) the identity of the individual(s) who were in charge of the financial affairs of the corporation. Brounstein, 979 F.2d at 954-55.

Applying the foregoing principles to the present case, we find that there is a genuine issue of material fact concerning whether Sullivan had "significant control" over Pat's financial affairs. Although the undisputed evidence in this record establishes that Sullivan functioned as the president of Pat's, exercised his signature authority on one occasion to sign a corporate check which was applied to Pat's tax liabilities, and devoted a significant amount of his time to raising capital for the company, the undisputed evidence also indicates that Sullivan's control over Pat's financial affairs was significantly circumscribed by Carrigan and Fendrick. As the district court stated in its opinion:

It is undisputed that Sullivan did not have exclusive control over the management of Pat's. Both parties agree that defendants Carrigan and Fendrick were responsible persons who willfully failed to Additionally, Sullivan did not own stock in Pat's, he never signed Pat's tax returns, he never negotiated with creditors on behalf of Pat's, and he had no independent authority to hire or fire employees without the consent of defendant Carrigan.

collect and pay Pat's withholding taxes. Defendant Carrigan was responsible for handling financial affairs. Defendant David Fendrick, Chief Financial Officer, maintained all of Pat's books, records, and bank accounts. Defendants Carrigan and Fendrick handled all creditors' inquiries and bills. Defendant Fendrick prepared and filed all federal income and employment tax returns. Defendant Fendrick also directed all negotiations with the IRS regarding the unpaid tax liabilities. Sullivan did not participate in any meetings with the IRS.

Sullivan was authorized to sign checks on behalf of Pat's with respect to the payroll account and the general operating account. However, the corporate books, records and checkbooks were locked in an office, and Sullivan did not have his own key. He signed only one check on behalf of the company. In July 1985, Sullivan signed a corporate check in the amount of $9,451.61 which was applied to Pat's outstanding tax liabilities for the third quarter of 1985.

In light of the foregoing facts that Sullivan was not responsible for handling the financial affairs of the company, did not prepare, maintain, or have access to any of the corporate books, records or checkbooks, did not prepare or sign any corporate tax returns, and did not handle any creditors' bills or inquiries nor negotiate with any creditor on behalf of Pat's, it cannot be said as a matter of law that he had significant control of the company's financial affairs. Based on all the evidence of record, we hold that a reasonable jury could find that Sullivan was not a...