1994 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

7-15-1994

United States of America v. Carrigan, et al.

Precedential or Non-Precedential:

Docket 93-5687

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Recommended Citation

"United States of America v. Carrigan, et al." (1994). 1994 Decisions. Paper 83.

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1 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

 ___________________________________ 

No. 93-5687 

 ___________________________________ 

UNITED STATES OF AMERICA 

v. 

ROBERT P. CARRIGAN, DAVID L. FENDRICK 

AND EDWARD M. SULLIVAN 

EDWARD M. SULLIVAN, Appellant 

 ___________________________________ 

On Appeal From the United States District Court 

For the District of New Jersey 

(D.C. Civil No. 92-cv-4443 

 ___________________________________ 

Argued May 5, 1994 

Before: SLOVITER, Chief Judge,

HUTCHINSON, Circuit Judge, and 

DIAMOND, District Judge* 

(Filed July 18, 1994) 

 ___________________________________ 

*Hon. Gustave Diamond, United States District Judge for the 

Western District of Pennsylvania, sitting by designation. 
2 

 Gary R. Allen, Esquire 

 Jonathan S. Cohen, Esquire 

 Marion E.M. Erickson, Esquire (Argued) 

 United States Department of Justice 

 Tax Division 

 P.O. Box 502 

 Washington, D.C. 20044 

 (Attorneys for Appellee) 

 Robert H. Louis, Esquire 

 Howard M. Soloman, Esquire (Argued) 

 Abrahams, Loewenstein, Bushman & Kauffman 

 1650 Market Street 

 3100 One Liberty Place 

 Philadelphia, PA 19103 

 (Attorneys for Appellant) 

 

 ______________ 

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 §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. 
3 

I. Background Facts0

 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.0 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 

 

0These facts are drawn exclusively from the parties' joint 

pretrial admissions and stipulations submitted to the district 

court. 

0The record also demonstrates that during his tenure as president 

of Pat's, Sullivan was aware that an employer has a duty to 

withhold and pay over to the United States the federal employment 

taxes of its employees. Sullivan also was aware that those 

individuals responsible for the collection and payment of 

employment taxes, who failed to do so, could be held personally 

liable for the amount of the employment taxes not paid to the 

United States. 
4 

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. 

§6672.0 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, 

1985.0 

 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 

 

0This section provides in pertinent part: 

§6672. Failure to Collect and Pay Over Tax, 

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 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. 

26 U.S.C.A. §6672. 

0At the same time, the IRS made assessments in the amount of 

$204,820.33 against Carrigan and $102,661.00 against David 

Fendrick ("Fendrick"), chief financial officer of Pat's, for the 

four quarters ending March 30, 1985, through December 31, 1985. 
5 

pursuant to §6672.0 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.0 Upon consideration of crossmotions 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 §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 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.0 

 

0Carrigan and Fendrick failed to plead or otherwise defend, and 

defaults were entered against them in this action on May 14, 

1993. They are not parties to this appeal. 

0In February 1992, Sullivan paid $100.00 of the assessment made 

against him, and simultaneously filed a claim for refund and a 

request for abatement of the entire assessment. The refund claim 

was denied by the IRS on May 8, 1992. 

0During the period that Sullivan was president and knew that the 

employment taxes were not being paid, there was a positive 

balance in the payroll account of no more than $9,856.61 and a 
6 

 The district court had jurisdiction over the parties' 

claims by virtue of 28 U.S.C.A. §§1340, 1345, and 1355 and 26 

U.S.C.A. §§7401 and 7402. We have jurisdiction over the appeal 

pursuant to 28 U.S.C.A. §1291. 

 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 §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. 

 

positive balance in the general operating account of no more than 

$132,770.43. 
7 

 A person responsible under §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 
8 

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 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. 

 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. 

 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. 
9 

 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 responsible person. Anderson v. Liberty Lobby, Inc., 

477 U.S. 242 (1986). We conclude, therefore, that the district 

court erred in granting summary judgment in favor of the United 

States on this issue. 

B. 

 We next consider whether Sullivan willfully failed to 

truthfully account for and pay over the taxes due. The term 

willfulness has been interpreted broadly to encompass a range of 

actions by responsible persons. Generally, willfulness is a 

"voluntary, conscious and intentional decision to prefer other 

creditors over the Government." Quattrone, 895 F.2d at 928. In 

this regard, "a responsible person acts willfully if he pays 

other creditors in preference to the IRS knowing that taxes are 

due." Id. A responsible person also acts willfully if he 

demonstrates a reckless disregard for whether taxes have been 

paid. Vespe, 868 F.2d at 1335. The "reckless disregard" 

standard is met if the taxpayer "'(1) clearly ought to have known 
10 

that (2) there was a grave risk that withholding taxes were not 

being paid and if (3) he was in a position to find out for 

certain very easily.'" Id. (quoting Wright v. United States, 809 

F.2d 425, 427 (7th Cir. 1987)). 

 Applying these principles to the instant case, we find 

that there is a genuine issue of material fact concerning whether 

Sullivan willfully failed to pay over the taxes due. Although 

the record establishes that Sullivan lent the company $20,000.00 

to pay its creditors, including the IRS, but took no other steps 

to direct that the tax liability be paid, the record also 

establishes that the one check that Sullivan did sign as 

president of Pat's, a check for $9,451.61, was paid to the IRS. 

 Additionally, the record before us is not clear 

concerning whether the check to the IRS came from the funds lent 

by Sullivan or from some other source. The record is equally 

unclear about how much tax was due when Sullivan signed the check 

to the IRS. Likewise, the record does not indicate what 

knowledge Sullivan had concerning Pat's tax liability when he 

made the $20,000.00 loan. Given his admittedly limited access to 

the company's tax and other financial records, Sullivan may not 

have acted with reckless disregard of whether the taxes were 

being paid when he took no steps to direct that the $20,000.00 be 

applied exclusively to Pat's tax liability. In light of all the 

evidence, we believe that a reasonable jury could find that 

Sullivan did not willfully fail to pay over the taxes due. We 

conclude, therefore, that the district court erred in granting 

summary judgment in favor of the United States on this issue. 
11 

III. Conclusion

 For the foregoing reasons, the judgment of the district 

court granting summary judgment for the United States will be 

reversed and the case will be remanded for further proceedings 

consistent with this opinion.0

_________________________________________________________________ 

 

 

 

 

0Sullivan also has appealed the denial of his motion for summary 

judgment. Because we have determined that there is a genuine 

issue of material fact regarding Sullivan's liability under 

§6672, we hold that the district court did not err in denying his 

motion for summary judgment.