Opinion
Case No. 00-7682-CIV-LENARD
April 25, 2002
ORDER GRANTING, IN PART, UNITED STATES' APPEAL FROM ORDERS OF BANKRUPTCY COURT AND REMANDING FOR FURTHER PROCEEDINGS
THIS CAUSE is before the Court on the United States' Appeal from the Bankruptcy Court's Order on Debtors' Objection to Claims 10 and 16 of the Internal Revenue Service and Order Denying United States' Motion to Reconsider, docketed November 13, 2000. (D.E. 1.) Appellant Internal Revenue Service ("IRS" or "Government") filed an Initial Brief on November 29, 2000. (D.E. 5.) Appellees Thomas J. Metzger and Betty S. Metzger filed a Response Brief on January 3, 2001. (D.E. 7.) Appellant filed a Reply Brief on January 22, 2001. (D.E. 8.) Having reviewed the briefs and the record, the Court finds as follows.
I. Factual and Procedural Background
In July. 1989, TM Building Products, Ltd. (the "Partnership") was formed as a Florida limited partnership engaged in the business of manufacturing and installation of windows and doors. The Partnership operated out of a Pompano Beach plant owned by Appellee and his wife. The Partnership was the successor of TM Products, Co., a Florida corporation that filed for bankruptcy in 1985. The "TM" in both names stood for "Thomas Metzger." (Tr. of 5/16/00 Hrg. at 32.)
At formation, the Partnership was owned by a limited partner, Corporate Life Insurance Co. ("Corporate Life"), a Pennsylvania corporation, and a general partner, TM Acquisition Corp. ("TM Acquisition"), a Florida corporation. Initially, Corporate Life had a 55% interest, and TM Acquisition had a 45% interest. Appellee and his family owned 35% of the stock in TM Acquisition, held in a voting trust of which Appellee was the trustee. The remaining 65% of the stock was held by an investment group headed by Gary Kabot.
At the outset, Kabot acted as Chief Executive Officer ("CEO") of the Partnership, with responsibility for managing its financial affairs. The Partnership hired Appellee as an employee at an annual salary of $120,000. Appellee claims that he was given the honorary title "President" for customer-relations purposes only. Appellee's primary duties consisted of managing the sales and manufacturing functions of the Partnership. According to Appellee, he avoided becoming responsible for any financial matters of the Partnership, due in part to his previous mismanagement of TM Products' financial activities.
During Kabot's tenure as CEO, the Partnership fell behind on its payroll tax obligations. Kabot was terminated in February, 1991. After Kabot's termination, David Smith, an officer of Corporate Life, assumed a role in managing the Partnership. Plaintiff asserts, and the bankruptcy court found, that Smith became the "effective CEO" of the Partnership. Smith was based in Atlanta but frequently visited the Partnership in Pompano Beach, Florida. Charles Williams was the Controller of the Partnership from August 1991 to March 1994. In June, 1992, Corporate Life acquired the shares of the Partnership owned by Kabot's investment group. In August, 1992, Appellee, along with his son Michael, attained check-signing authority over a new account opened by Partnership. It is undisputed that, at least until November, 1994, Michael signed most of the checks on this account. In November, 1993, Corporate Life appointed Pat Nigro as CEO of the Partnership.
In February, 1994, Corporate Life was liquidated by the Insurance Commission of Pennsylvania. All Corporate Life officers, including Smith, were terminated during the liquidation. Nigro remained CEO of the Partnership until April, 1994. Appellee admits that, subsequent to Nigro's departure, Appellee assumed responsibility for the Partnership's financial affairs. In February, 1995, Appellee caused the Partnership to file a voluntary bankruptcy petition.
On March 15, 1999, Appellee and his wife filed a voluntary petition for Chapter 11 bankruptcy. The IRS filed a proof of claim on April 15, 1999 for a trust fund recovery penalty of $851,416.21, plus $114,792.49 in interest, against Appellee, for the tax periods beginning January 1, 1992 and ending March 31, 1995. Appellee filed an Objection to IRS Claims 10 and 16. After a hearing on May 16, 2000, U.S. Bankruptcy Judge Raymond B. Ray issued an order sustaining Appellee's objection to the IRS claims as to the first seven of the nine quarterly tax periods at issue and allowing the IRS's claim as to the final two quarters. The Government filed a motion to reconsider, on grounds that the bankruptcy court improperly imposed the burden of proof on the Government with respect to whether Appellee was a "responsible person" for purposes of the trust fund penalty. Judge Ray denied the Government's motion, holding that even if Appellee had the burden of proof, Appellee had carried his burden and demonstrated that he was not a "responsible person" during the seven disputed quarters. The Government appeals Judge Ray's denial of its claim with respect to those seven quarters and his denial of the motion to reconsider.
II. Parties' Arguments
Appellant argues that the bankruptcy court erred in four respects: (1) excluding a proof of claim from a prior bankruptcy, offered to impeach Appellee's credibility; (2) placing the burden of proof on the United States to prove that Appellee was a "responsible person" under 26 U.S.C. § 6672; (3) certain findings of facts were clearly erroneous; and (4) failing to determine that Appellant was responsible for withholding, accounting for, and paying over the employment taxes of TM Building Products, Ltd., and that he willfully failed to do so, for all relevant tax periods.
III. Standard of Review
When reviewing a bankruptcy court's decision, a district court functions as an appellate court. In re Williams, 216 F.3d 1295, 1296 (11th Cir. 2000). On appellate review, factual findings of a bankruptcy court are reviewed under the limited and deferential "clearly erroneous" standard. FED. R. BANKR. P. 8013; In re Optical Techs., Inc., 246 F.3d 1332, 1334-35 (11th Cir. 2001). Determinations of law and application of the bankruptcy code, on the other hand, must be reviewed de novo. Optical Techs., 246 F.3d at 1335.
IV. Analysis
As a general rule, creditors' entitlement in bankruptcy arise from the underlying substantive law creating the debtor's obligation, subject to any qualifying or contrary provisions of the Bankruptcy Code. Raleigh v. Ill. Dep't of Revenue, 530 U.S. 15, 20 (2000). Here, the Court looks to the Internal Revenue Code to determine the obligations of the bankrupt estate with respect to claims by the IRS. The statute provides:
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 of 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.26 U.S.C. § 6672 (1989). A section 6672 "penalty" is assessed and collected in the same manner as a tax. 26 U.S.C. § 6671 (a) (1989). Although denominated a "penalty," section 6672 is not penal in nature; rather, it is merely a means of ensuring collection of the taxes withheld from employees' paychecks. Such withholdings constitute a special trust fund held for the benefit of the United States, pursuant to 26 U.S.C. § 7501.
Section 6672 imposes liability upon (1) a "responsible person" (2) who has acted "willfully" in not paying over the taxes. Malloy v. United States, 17 F.3d 329, 332 (11th Cir. 1994); George v. United States, 819 F.2d 1008, 1011 (11th Cir. 1987). Generally, courts have "interpreted rather broadly who will constitute a `reasonable person' under section 6672." Williams v. United States, 931 F.2d 805, 810 (11th Cir. 1991). "Liability attaches to any person who, based on her status in the corporation, has the `actual authority or ability' to pay the taxes."Harris v. United States, 175 F.3d 1318, 1321 (11th Cir. 1999). "Responsibility is a matter of status, duty, and authority." Id. (quotingMazo v. United States, 591 F.2d 1151, 1156 (5th Cir.), cert. denied, 444 U.S. 842 (1979)). "Indicia of responsibility include the holding of corporate office, control over financial affairs, the authority to disburse corporate funds, stock ownership, and the ability to hire and fire employees." Id. (quoting George, 819 F.2d at 1011). The law is clear that more than one person may be a "responsible person" for an employer.George, 819 F.2d at 1011; Roth v. United States, 779 F.2d 1567, 1571 (11th Cir. 1986).
The crucial issue on appeal is whether the bankruptcy court erred by saddling the Government with the burden of proof with regard to Appellee's "reasonable person" status. Based on the Court's reading of the case law, it appears that the Eleventh Circuit has not addressed this particular issue. In a case that is binding on the Eleventh Circuit, however, its predecessor held that the taxpayer had the burden of proving either that he was not a "responsible person" or that he did not willfully fail to pay over the withheld taxes. J.F. Liddon v. United States, 448 F.2d 509, 514-15 (5th Cir. 1971), cert. denied, 406 U.S. 918 (1972). Subsequently, in another case of binding precedent, the Fifth Circuit stated, "once an assessment of penalty taxes is made and it is established that the taxpayer is a responsible person, the burden of proving lack of willfulness is on the taxpayer." Mazo v. United States, 591 F.2d 1151, 1155 (5th Cir. 1979). The Mazo court did not address, specifically, which party had the burden of establishing that the taxpayer is a responsible person. Later, in cases of non-binding precedent, the Fifth Circuit continued to cite Liddon for the proposition that a taxpayer has the burden of proving that he is not a responsible person under section 6672. Morgan v. United States, 937 F.2d 281, 285 (5th Cir. 1991); see also Barnett v. United States, 988 F.2d 1449. 1453 (5th Cir. 1993).
Cases decided by the Fifth Circuit prior to October 1, 1981 are binding precedent in the Eleventh Circuit. Bonner v. City of Pritchard, 661 F.2d 1206 (11th Cir. 1981) (en banc).
The Eleventh Circuit, without specifically addressing the issue, has quoted the following language from Mazo: "Once it is established that a taxpayer is a responsible person, the burden of proving lack of willfulness is on the taxpayer." E.g., Thibodeau, 828 F.2d 1499, 1505 (11th Cir. 1987); George, 819 F.2d at 1011. Subsequently, in Williams, the Eleventh Circuit explicitly stated that it would not address the burden of proof issue. 931 F.2d at 809. Yet it also stated, "Once an individual is established as a `responsible person,' he has the burden of disproving willfulness." Id. at 810. In the next relevant case, the court cited Williams for the following proposition: "Once an individual is established as a `responsible person,' the burden shifts to the individual to disprove willfulness. Malloy, 17 F.3d at 332.(emphasis added). In Malloy, however, the taxpayer conceded that he was a "responsible person." Id. at 331. Thus, the Eleventh Circuit has apparently never had an opportunity to discuss the narrow issue of whether the Government has the burden of proving that the individual is a "responsible person."
A number of bankruptcy courts and a panel of district court judges have interpreted these Eleventh Circuit cases to create a burden-shifting concept, where the Government has the initial burden to prove that the individual is a responsible person, and the burden shifts to the taxpayer to show a lack of willfulness. See, e.g., In re DeMarco, 258 B.R. 480, 484 (Bankr. M.D. Fla. 1999), affirmed, 256 B.R. 320 (M.D. Fla. 2000); In re Sims, 126 B.R. 618, 621 (Bankr. M.D. Fla. 1991); Lefkowitz v. United States, No. 89-1351-CIV-ATKINS, 1990 WL 105881, at *3 (S.D. Fla. 1990); PATTERN JURY INSTRUCTIONS (CIVIL CASES), No. 10.6 (Committee on Pattern Jury Instructions District Judges Assoc. Eleventh Circuit ed., 2000). After tracing the evolution of the case law in this Circuit and examining cases from other circuits that have addressed the issue directly, however, the Court is convinced that the burden-shifting concept is neither mandated by the Eleventh Circuit nor justified by policy considerations.
The Pattern Jury Instructions are not binding, yet the Court generally considers them a valuable resource, reflecting the collective research of a panel of distinguished district court judges. In this instance, however, the most recent edition of the Instructions contains an unexplained change from previous versions. In 1990, the Eleventh Circuit Pattern Jury Instructions mirrored those of the Fifth Circuit, placing the burden on the individual to prove "either that he was not a person whose duty it was to collect and pay over the taxes in question, or that he did not willfully fail to collect and pay over such taxes." PJI No. 13.6. In the 2000 edition, the Committee introduced the burden-shifting concept, citing Mazo, George, and Thiboduau, supra, without additional explanation. PJI No. 10.6. As these cases were decided prior to 1990, and the Fifth Circuit does not interpret Mazo to require burden shifting, the Court respectfully disagrees with the new instruction.
When the IRS assesses a tax, a rebuttable presumption arises that the assessment is correct. See United States v. Janis, 428 U.S. 433, 440 (1976); Bull v. United States, 295 U.S. 247, 259-60 (1935). A taxpayer who wishes to challenge the assessment bears the burdens both of production and persuasion. Janis, 428 U.S. at 440; Ruth v. United States, 823 F.2d 1091, 1093 (11th Cir. 1987). Since a section 6672 penalty is equivalent to a tax see 26 U.S.C. § 6671 (a), a majority of circuits addressing the issue has held that the Government's introduction of a certified copy of the assessment is sufficient to shift the burden of proof to the individual to show either that he is not a responsible person or that he did not willfully fail to a the taxes. See United States v. McCombs, 30 F.3d 310, 318-19 (2d Cir. 1994); Brounstein v. United States, 979 F.2d 952, 954 (3d Cir. 1992); Hochstein v. United States, 900 F.2d 543, 546 (8th Cir. 1990); Ruth, 823 F.2d at 1093; Caterino v. United States, 794 F.2d 1, 5 (1st Cir. 1986); Calderone v. United States, 799 F.2d 254, 258 (6th Cir. 1987); United States v. Lease, 346 F.2d 696, 701 (2d Cir. 1966). These courts have applied the burden of proof uniformly, regardless of whether the Government was a counter-claimant in litigation brought to settle liability under section 6672, or a pure claimant in a collection action predicated on section 6672 liability. See McCombs, 30 F.3d at 318-19 (internal cites omitted). The Court sees no reason to alter the standard when the Government is a claimant in a bankruptcy case. See Raleigh, 530 U.S. at 20-21 ("But the [Bankruptcy] Code makes no provision for altering the burden on a tax claim, and its silence says that no change was intended.")
Placing the burden on the individual is consistent with the Eleventh Circuit's direction that the term "responsible person" is to be construed broadly. See Williams, 931 F.2d at 810. Moreover, this result is sound for a number of policy reasons: (1) "the vital interest of the government in acquiring its lifeblood, revenue"; (2) "the taxpayer's readier access to the relevant information"; and (3) "the importance of encouraging voluntary compliance by giving taxpayers incentives to self-report and to keep adequate records in case of dispute." Raleigh, 530 U.S. at 21 (holding that a bankruptcy estate had the burden of proof under the Illinois tax code's equivalent to section 6672). For all of these reasons, the Court concludes that the burden of proof with respect to Appellee's "responsible person" status should have been placed upon Appellee.
In its order denying Appellant's motion for reconsideration, the bankruptcy court stated that even if the burden had been placed upon Appellee, he had satisfied the burden. The Court finds that because the burden of proof is integral to the entire proceeding, the case must be remanded to the bankruptcy court for new findings of fact and conclusions of law consistent with this order. Accordingly, it is
For instance, at the outset of the evidentiary hearing, the bankruptcy court placed the initial burden of going forward with the evidence upon the Government. (Tr. at 12.)
Because the bankruptcy court will need to enter new findings of fact upon remand, the Court need not rule upon Appellant's challenges to certain evidentiary rulings by the bankruptcy court.
ORDERED AND ADJUDGED that:
1. The United States' Appeal from the Bankruptcy Court's Order on Debtors' Objection to Claims 10 and 16 of the Internal Revenue Service, and the Order Denying United States' Motion to Reconsider, docketed November 13, 2000, is GRANTED in part, consistent with this Order.
2. The case is REMANDED to the bankruptcy court for new findings of fact and conclusions of law, consistent with this Order.
3. This case is CLOSED.
4. All motions not otherwise ruled upon by separate order are DENIED AS MOOT.