Opinion
Civil Action No. 99-787-GMS
June 17, 2003
MEMORANDUM AND ORDER
I. INTRODUCTION
On November 15, 1999, the United States of America filed the above-captioned action against Albert and Woldemar Schock seeking to reduce tax assessments to judgment and to foreclose on its tax liens.
Presently before the court is the United States' motion for summary judgment on Counts One and Two of the complaint For the following reasons, the court will grant this motion.
II. STANDARD OF REVIEW
The court may grant summary judgment "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." FED. R. Civ. P. 56(c); see also Boyle v. County of Allegheny Pa., 139 F.3d 386, 392 (3d Cir. 1998). Thus, summary judgment is appropriate only if the moving party shows there are no genuine issues of material fact that would permit a reasonable jury to find for the non-moving party. Boyle, 139 F.3d at 392 — A fact is material if it might affect the outcome of the suit, Id. (citing Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-248 (1986)). An issue is genuine if a reasonable jury could possibly find in favor of the non-moving party with regard to that issue. Id. In deciding the motion, the court must construe all facts and inferences in the light most favorable to the non-moving party. Id.; see also Assaf v. Fields, 178 F.3d 170, I73-74 (3d Cir. 1999).
III. BACKGROUND
A. Schock Brothers, Inc.
Between 1973 and 1988, Albert and Woldemar Schock owned a business incorporated as Schock Brothers, Inc. ("Schock Brothers") — Each brother was a fifty percent shareholder in this business. Albert Schock ("Albert") was the president of the business. He also occasionally supervised employees, had check signing authority on the bank accounts of Schock Brothers, and executed loans on the company's behalf. Additionally, he personally loaned money to Schock Brothers to pay unpaid bills.
Albert and his brother Woldemar ("Woldemar") were equals at Schock Brothers in that neither was the other's boss. The brothers discussed the business on a daily basis, including discussions about the corporation's finances, and their salaries. They also discussed matters relating to personnel and loans. Additionally. Woldemar was in charge of the payroll, cash disbursals, and the finances of the corporation. Accordingly, he had check signing authority, as well as the authority to execute loans on behalf of the corporation and to sign its tax returns.
From the mid-1980s until it filed for bankruptcy protection in 1988, Schock Brothers experienced significant cash flow problems. At his deposition, Woldemar testified that he knew there were cash flow problems and that he discussed these problems with his brother.
Woldemar further testified that he became aware of the unpaid taxes as soon as the tax returns were prepared and there was a balance due reported on the return. According to him, he then informed his brother of the unpaid taxes. Albert testified that he was "probably" aware of the unpaid taxes as early as 1986. Although they were aware of their unpaid taxes, the brothers nevertheless continued to pay other creditors, including payroll, utilities, and rent. Woldemar did, however, pay some of the outstanding taxes from his personal funds.
On February 27, 1989, a delegate of the Secretary of the Treasury of the United States made an assessment against Albeit pursuant to Section 6672 of the Internal Revenue Code. Specifically, the delegate charged Albeit with willful failure to collect, account for, and pay withheld income and Federal Insurance Contributions Act taxes due and owing from Schock Brothers for the periods ending March 3 1, I986 through December 31, I987, On May 29, 1989, a delegate of the Secretary of the Treasury of the United States charged Albert pursuant to Section 6672 of the Internal Revenue Code for the periods ending March 31, 1988 through December 31, 1988. Woldemar was likewise charged on February 27, 1989 and June 18, 1989.
B. Kitchen Bath Store, Inc.
In addition to his responsibilities with regard to Schock Brothers, Woldemar was also the sole owner of the Kitchen Bath Store, Inc. ("Kitchen Bath Store") — This business provided sales and installation of kitchen and bath equipment. It was in business between 1988 and 1997. In his capacity as the owner of the corporation, Woldemar signed the corporation's checks and otherwise ran the business. At his deposition, he testified that he became aware of the unpaid taxes as the tax returns were prepared and reflected unpaid tax liabilities. Although the liabilities began to accrue in 1993, Kitchen Bath Store continued to operate until 1997.
On February 19, 1997, a delegate of the Secretary of the Treasury of the United States made an assessment against Woldemar pursuant to the provisions of Section 6672 of the Internal Revenue Code by reason of his willful failure to collect, account for, and pay over withheld income and Federal Insurance Contributions Act taxes due and owing from Kitchen Bath Store for the periods ending March 31, I993 through June 3 0, I996.
IV. DISCUSSION
Employers are required to withhold from the wages of their employees income and social security taxes, and to hold such taxes in trust for the United States. See 26 U.S.C. § 3102, 3401, 7501; see also Greenbergv. United States, 46 F.3d 239, 242 (3d Cir. 1994). Because the United States is required to credit employees for the withheld taxes "regardless of whether they are paid by the employer/' Congress provided that officers and employees can be held personally liable for the taxes when the trust fund taxes are not paid on a timely basis. In re RIBS-R-US, Inc., 828 F.2d 199, 200 (3d Cir. 1987).
Before a person may be liable under Section 6672, however, two elements must be satisfied. First, he or she must have been a person required to collect, truthfully account for, or pay over the employment or trust fund taxes (the "responsibility prong") — See Quattrone Accountants, Inc. v. Internal Revenue Serv. 895 F.2d 921, 927 (3d Cir. 1990). Second, he or she must have willfully failed to collect, account for, or pay over the trust fund taxes (the "willfulness prong.") — See id. The court will now discuss each of these prongs in turn.
A. The Responsibility Prong
The Third Circuit Court of Appeals has held that responsibility under Section 6672 is a "matter of status, duty or authority, not knowledge." Greenberg, 46 F.3d at 243. "While the responsible person must have significant control over the corporation's finances, exclusive control is not necessary." Id. In addition, "[t]he responsible person need not be corporate officer." Quattrone, 895 F.2d at 927. "A person has significant control if he has the final or significant word over which bills or creditors get paid." Id.
The term "significant control" is meant to encompass all those persons connected closely with the business who could have prevented the tax default from occurring. See Bowlen v. United States, 956 F.2d 723, 728 (7th Cir. 1992) "The concept of responsibility in this context does not focus on whether the person himself could have paid the taxes; rather it focuses on whether the person could have impeded the flow of business to the extent necessary from squandering the taxes it withheld from its employees." Thomas v. United Slates, 41 F.3d 1109, 1113 (7th Cir. 1994); see also Greenberg, 46 F.3d 24-3-44. In this regard, control over the day-to-day affairs of the company is not required for an individual to be a responsible person; all that is required is that he be in such a position that he has a right to execute control over the affairs of the company. See Thomsen v. United States, 887 F.2d 12, I6 (1st Cir. 1989).
Courts have considered the following factors in determining whether an individual is a responsible person:
1. The ability of the individual in question to sign checks on the corporation's bank accounts;
2. The identity of the individual(s) who signed the corporation's quarterly Form 941 tax returns during the tax quarters in question, as well as other tax returns of the corporation;
3. The identity of the corporation's officers, directors, and stockholders;
4. The identity of the individuals who hired and fired employees;
5. The individual or individuals who had control of the financial affairs of the corporation on a day-to-day basis, and/or who made decisions or participated in making decisions as to disbursement of funds and payments to creditors;
6. Payment of other creditors in lieu of the United States; and
7. The duties of the individual, if an officer, as set forth in the contents of the corporation's bylaws.See Greenberg, 46 F.3d at 243.
1. Albert Schock is a Responsible Person
In the present case, the undisputed evidence establishes that Albert exercised significant control over the operations and financial matters of Schock Brothers from 1986 until 1988. As he admitted during his deposition testimony, he was the president of the corporation. See Deposition of Albert Schock at 13. Additionally, he was an authorized signatory on the corporation's checking accounts, and he signed payroll and other miscellaneous checks. See id. at 21; see also Deposition of Woldemar Schock at 13.
Albert also personally loaned money to the corporation, as well as executed loans on behalf of the corporation. See Deposition of Albert, Schock at 24, 26; see also Deposition of Woldemar Schock at 61. Furthermore, he testified at his deposition that he ran the business as an equal with his brother and that he occasionally supervised employees. See Deposition of Albert Schock at 16, 54. Although Albert maintains that he delegated the financial aspects of the business to Woldemar there can be no dispute that, within the corporate structure, Albert possessed the power and authority to ensure that the employment taxes were paid. Consequently, the fact that Albert may have elected not to exercise the authority that he possessed over the corporate finances does not negate the existence of such authority. See e.g, Bowlen, 956 F.2d at 728 (noting that the delegation of the duty to pay taxes does not relieve the responsible person of Section 6672 liability); see also McCray v. United States, 910 F.2d 1289, 1290 (5th Cir. 1990) (holding the plaintiff liable under Section 6672 even though he "was not the corporate officer directly in charge of paying federal taxes.")
Accordingly, the court concludes that, as president, lender, corporate signatory, and owner, Albert had, and exercised, significant control over corporate decisions. As a matter of law then, he had the duty to truthfully account for, and pay, the employment taxes.
2. Woldemar Schock is a Responsible Person
In light of Woldemar's deposition testimony, the court must conclude that he is also a responsible person of Schock Brothers. He held significant control over all aspects of the corporation, including its finances. Specifically, from its inception, he was an officer of the corporation. See Deposition of Woldemar Schock at 12. He was in charge of the payroll, cash disbursals, and the finances of the corporation. See id. at 13, 19. He also had check signing authority and the authority to execute loans on behalf of the corporation See id, at 13, 77. Additionally, he signed the tax returns of the corporation, and he hired and fired employees. See id. at 60, 95, 101, 38.
Likewise, Woldemar was a responsible person of Kitchen Bath Store. He held exclusive control over the finances and operations of the business. See id. at 10., He also signed the corporation's checks. See id. at 58.
These facts demonstrate that Woldemar held significant control over Schock Brothers and Kitchen Bath Store. Thus, like Albert, Woldemar was a responsible person under Section 6672 of the Internal Revenue Code.
B. The Willfulness Prong
The Third Circuit Court of Appeals has stated that willfulness under Section 6672 means a "voluntary conscious and intentional decision to prefer other creditors over the Government." Greenberg, 46 F.3d at 244. Furthermore, "[o]ne who was a responsible person when the taxes were incurred [by the business], and who only later becomes aware that they were not paid, acts willfully by then paying other creditors in preference to the United States, even if the money specifically withheld has been dissipated" United States v. Vespe, 868 F.2d 1328, 1335 (3d Cir, 1989). Additionally, "[t]he taxpayer need not act with an evil motive or bad purposes for his action or inaction to be willful" Greenberg, 46 F.3d at 244
Therefore, knowledge of the unpaid liability, and the failure to pay the liability when the corporation had the funds to do so, is all that is necessary to establish willfulness as a matter of law. It is no defense that "the corporation was in financial distress and that the funds were spent to keep the corporation in business with an expectation that sufficient revenue would later become available to pay the United States." Id. Thus, "[a]ny payment to other creditors, including the payment of net wages to the corporation's employees, with knowledge that the employment taxes are due and owing to the Government, constitutes a willful failure to pay the taxes." Id.
1. Albert Schock Acted Willfully
The undisputed record evidence demonstrates that Albert willfully failed to collect, account for, and pay Schock Brothers' employment taxes. Specifically, Woldemar testified at his deposition that he informed Albert of the unpaid tax liabilities. See Deposition of Woldemar Schock at 46, 62-63. Albert himself testified that he "probably" became aware of the unpaid taxes as early as 1986. See Deposition of Albert Schock at 33. Moreover, despite the fact that Albert was aware of the unpaid taxes, he allowed other creditors to be paid, including the payroll. See id, at 29.
In light of Woldemar's sworn testimony, and Albert's admissions on this issue, the court concludes that Albert willfully failed to collect, account for, or pay the employment taxes of Schock Brothers as a matter of law.
2. Woldemar Acted Willfully
During his deposition, Woldemar testified that he had discovered by March 1986 that Schock Brothers had unpaid payroll taxes. See Deposition of Woldemar Schock at 59-60. He was aware of this fact because he would review and sign the payroll tax returns.: See id. Despite this knowledge, Schock Brothers continued to pay other creditors between 1986 and 1988, including its payroll, in an effort to continue to operate. See id. at 59-60. Moreover, these payments were made on checks bearing Woldemar's signature. See Govt.;Exhs. 15, I6. Because he was aware of Schock Brothers' tax liability, and because the corporation paid other creditors ahead of the IRS, the court concludes that Woldemar acted willfully pursuant to Section 6672.
Additionally, the court finds that Woldemar acted willfully with regard to the Kitchen Bath Store corporation as well He became aware of the unpaid taxes as the tax returns were prepared. See Deposition of Woldemar Schock at 67. Indeed, he was aware of the liability as soon as it began to accrue in 1993. He nevertheless allowed other creditors to be paid ahead of the IRS in order to keep the company in business. He thus willfully failed to pay the trust fund taxes with regard to the Kitchen Bath Store.
C Amount of Tax Liability
Albert and Woldemar Schock argue that the amount claimed as due by the IRS is incorrect. Specifically, they assert that the IRS has not properly credited payments for approximately $49,000 and for $650. They further assert that the IRS has erroneously assessed them with the trust fund taxes for the fourth quarter of 1988. The court will address each issue in turn
To demonstrate the existence and amount of the defendants' outstanding tax liability, the United States submitted Forms 4340, Certificates of Assessments and Payments. See Gov't Exhs. 24, 25, 26. A Certificate of Assessment is probative evidence in and of it self, and, in the absence of contrary evidence, is sufficient to establish that assessments of tax were properly made, that notices were sent, and the amount of the payments. See Freck v. Internal Revenue Service, 37 F.3d 986, 991-92, n. 8 (3d Cir. 1994).
The Certificates of Assessment indicate that a payment in excess of $49,000 was applied to Schock Brothers' employment tax liability and credited to Woldemar and Albert Schock's corresponding trust fund taxes for the period ending March 31, I986 and September 30, I986. See Gov't Exhs. 24, 25. This payment satisfied the trust fund recovery taxes for that period. Accordingly, as the United States has conceded, the brothers now owe trust fund taxes for the fourth quarter of 1986, and the first, second, third, and fourth quarters of the years 1987 and 1988,
The defendants also contend that Mellon Bank paid the IRS $650 pursuant to a notice of levy which the IRS did not credit to any outstanding liabilities. However, the record evidence indicates that the funds obtained from the notice of levy in the amount of $650 were applied to the penalties and interest associated with Kitchen Bath Stores employment tax liabilities. See Schoettinger' Decl. at ¶ 7.
Finally, the defendants assert that the IRS erroneously assessed them Schock Brothers' trust fund taxes for the last quarter of 1988. According to the defendants, Shock Brothers was not in business during that time. However, the docket report for the chapter 11 bankruptcy petition indicates otherwise. Specifically, on February 18, 1988, Schock Brothers filed for chapter 11 relief. It continued to operate while it attempted to reorganize until November 8, 1988, The defendants have not contradicted this evidence. Accordingly., they have failed to establish that there is a genuine issue of material fact as to the accuracy of the IRS' calculations with respect to the trust fund recovery penalty assessments.
V. CONCLUSION
For the foregoing reasons, IT IS HEREBY ORDERED that:
1. The United States' Motion for Summary Judgment on Counts I and II (D.I. 43) Is GRANTED.