Opinion ID: 675099
Heading Depth: 2
Heading Rank: 2

Heading: Taxpayer Liability Under Section 6672

Text: 22 We turn first to the finding of Nancy's tax liability under section 6672, the liability disputed by appellants but relied on by the government to encumber the Property. 23 Section 6672(a) provides, in pertinent part: 24 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 ... be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. 25 26 U.S.C. Sec. 6672(a). The statute requires, therefore, that two elements be established before personal liability for unpaid withholding taxes attaches: [F]irst, the individual must be a person responsible for the collection and payment of withholding taxes, i.e., he must have the authority to direct the payment of corporate funds; second, the individual's failure to comply with the statute must be willful. Hochstein v. United States, 900 F.2d 543, 546 (2d Cir.1990). 26 Appellants contend that the evidence at trial was insufficient to support a finding of liability under section 6672. Although they do not attack the assessment itself, they contend that the evidence was insufficient to support a finding that Nancy was a responsible person and/or that she acted willfully within the meaning of the statute. Specifically, they argue that Nancy's testimony at trial was sufficient to rebut the presumption of correctness accorded the government's prima facie case for section 6672 liability set forth in its tax assessment. Appellants insist, therefore, that, by virtue of Nancy's testimony at trial that she had no responsibility for paying Spinnaker Pole's employee withholding taxes and was unaware that those taxes had not been paid, the government should have been required, at the very least, to come forward with additional proof beyond the assessment itself to support its claim for tax liability. 27 In concluding that the government established liability under section 6672 against Nancy, the magistrate judge relied primarily on the evidentiary weight accorded the tax assessment itself. Applying the settled rule that a tax assessment is accorded a presumption of correctness, the court followed a plethora of case law which places the burden of production as well as the burden of persuasion on the individual assessed the tax to prove by a preponderance of the evidence that the assessment is incorrect. 826 F.Supp. at 1486. Because the magistrate judge found Nancy's testimony to be incredible on the issue of responsibility and supportive of the government's case on the issue of willfulness, the magistrate judge concluded that Nancy failed to carry her burden of persuasion on either of the elements underlying section 6672 liability. Id. at 1486-90. The magistrate judge determined, therefore, that the government was not required to go forward with evidence beyond the tax assessment itself to establish Nancy's liability for the unpaid taxes as a matter of law. We agree.
28 In general, a government tax assessment is entitled to a presumption of correctness. See United States v. Janis, 428 U.S. 433, 440, 96 S.Ct. 3021, 3025, 49 L.Ed.2d 1046 (1976); Bull v. United States, 295 U.S. 247, 259-60, 55 S.Ct. 695, 79 L.Ed. 1421 (1935). A taxpayer who wishes to challenge the validity of the assessment, moreover, bears the burdens both of production and of persuasion. Ruth v. United States, 823 F.2d 1091, 1093 (7th Cir.1987) (citing Janis, 428 U.S. at 440, 96 S.Ct. at 3025); see also Psaty v. United States, 442 F.2d 1154, 1159-60 (3d Cir.1971). 29 In the context of section 6672, however, courts have extended the presumption of correctness not merely to the amount of the assessment itself but also to the existence of the two elements, responsibility and willfulness, that underlie the imposition of this type of tax liability. Hochstein, 900 F.2d at 546; see also Honey v. United States, 963 F.2d 1083, 1087 (8th Cir.), cert. denied, --- U.S. ----, 113 S.Ct. 676, 121 L.Ed.2d 598 (1992); Ruth, 823 F.2d at 1093; Calderone v. United States, 799 F.2d 254, 258 (6th Cir.1986); Psaty, 442 F.2d at 1160. 30 In United States v. Lease, 346 F.2d 696, 701 (2d Cir.1965), we set forth the manner by which the presumption operates: 31 [O]verall, the Government has the burden of coming forward and persuading the trier that the taxpayer has or had a tax liability. If not challenged the assessment establishes that liability. A taxpayer's challenge must persuade the trier by a preponderance of the evidence that the assessment is erroneous. The Government then [once the taxpayer meets her burden] must still persuade the trier that on the basis of all the evidence there was tax liability--perhaps in a different amount than initially asserted--for which the taxpayer was responsible. 32 We recently simplified the operation of that presumption in the section 6672 context to one in which a taxpayer bears the burden of proving by a preponderance of the evidence that one or both of these elements [willfulness and responsibility] [are] not present in order to defeat tax liability under section 6672. Hochstein, 900 F.2d at 546 (emphasis added). 33 In allocating the risk of nonpersuasion to the taxpayer in a case governed by section 6672, we are cognizant that the government is the claimant in this litigation. Despite this fact, we, as well as our sister circuits, have uniformly rejected the temptation to allocate the risk of nonpersuasion to the government where its procedural posture is that of either a counter-claimant in litigation brought to settle liability under section 6672, see, e.g., Hochstein, 900 F.2d at 546; Ruth, 823 F.2d at 1093; Calderone, 799 F.2d at 258; Anderson v. United States, 561 F.2d 162, 165 (8th Cir.1977); Psaty, 442 F.2d at 1160; Lesser v. United States, 368 F.2d 306, 310 (2d Cir.1966) (in banc), or, as here, a pure claimant in a collection action predicated on section 6672 liability, see, e.g., Lease, 346 F.2d at 700. As we stated in Lease : 34 Had [the taxpayer] chosen to follow either of the more typical methods available for questioning his tax liability-- ... [such as a] suit for refund of asserted overpayments--he would clearly have been obliged to present evidence contradicting the Commissioner's view of his tax liability and thus tending to rebut the presumption of correctness attaching to the assessment. As a plaintiff ... he would also have had the burden of persuading the trier by a preponderance of the evidence that the deficiency was factually incorrect or that the amount paid exceeded the true tax liability. We can see no reason why the taxpayer should be in any better position when he takes advantage of none of the available procedures and rather waits until the Government has to resort to enforcing its lien before he attempts to cast doubt upon the underlying tax liability. 35 Lease, 346 F.2d at 700 (citations omitted). Our cases make clear, therefore, that the presumption of correctness of a tax assessment, which serves to place the burden of production as well as the burden of persuasion on a plaintiff taxpayer who challenges section 6672 tax liability by seeking a refund of his partial payment, applies with equal force in a collection action where the taxpayer is a defendant.
36 Appellants contend that they carried their burden of persuasion on the liability issue and challenge the magistrate judge's finding to the contrary. Accordingly, having determined that the magistrate judge correctly allocated the burdens of proof at trial, we proceed to review the merits of the magistrate judge's finding that Nancy was liable for the unpaid taxes pursuant to section 6672.
37 In this Circuit, the issue of whether a person is responsible within the meaning of section 6672 presents a mixed question of fact and law. Hochstein, 900 F.2d at 547. Accordingly, we review the district court's findings on Nancy's role in the finances at Spinnaker Pole for clear error, and give plenary review to the magistrate judge's conclusion that this role makes her responsible within the meaning of the statute. Id. 38 A person who may be found responsible under section 6672 includes an officer or employee of a corporation ... who as such officer [or] employee ... is under a duty to perform the act in respect of which the violation occurs. 26 U.S.C. Sec. 6671(b). The mere fact that an individual is a corporate officer is not, by itself, sufficient to make that individual a responsible person within the definition of the statute. Rather, [t]he key element ... is whether that person has the statutorily imposed duty to make the tax payments. O'Connor v. United States, 956 F.2d 48, 51 (4th Cir.1992). This duty, moreover, is considered in light of the person's authority over an enterprise's finances or general decision making. Id. 39 In determining whether an individual's role in a corporation rises to the level of responsibility for collecting and paying withholding taxes within the meaning of the statute, we look to several factors ..., including the individual's duties as outlined in the corporate bylaws, his ability to sign checks, his status as an officer or director, and whether he could hire and fire employees. Hochstein, 900 F.2d at 547. The central question, however, is whether the individual has significant control over the enterprise's finances. Id. 40 Here, Nancy was the president of Spinnaker Pole and had signatory authority for the corporation as demonstrated by her acting alone on behalf of Spinnaker Pole to make the purchase offer for the Restaurant. The district court found, moreover, that she owned 60 percent of the stock in the corporation. Although she testified that she knew nothing about the books, her deposition testimony introduced on cross-examination indicated otherwise. Indeed, in that deposition she testified that she was Spinnaker Pole's bookkeeper. Admittedly, she testified at trial that her deposition testimony was in error on this subject and that she was generally ignorant of the overall financial situation of the Restaurant. Nevertheless, she admitted that it was her responsibility to make sure that everyone got paid. Her insistence, moreover, that she carried out this responsibility, as well as the bookkeeping, by delegating those responsibilities to other individuals, is not, without more, sufficient to carry her burden of proving that she was not a responsible person. Accordingly, we conclude from the evidence presented at trial that the magistrate judge did not err in concluding that Nancy was a responsible person within the meaning of section 6672.
41 While we are mindful that the question of willfulness in this context normally is a question of fact, we have, nonetheless, reviewed a district court's ultimate conclusion on that issue as a matter of law. Hochstein, 900 F.2d at 548. Accordingly, we review the magistrate judge's finding that Nancy's failure to withhold taxes was willful under the same standard by which we reviewed the issue of responsibility. 42 We have said that [a] person willfully fails to pay withholding taxes within the meaning of section 6672 when [she] pays other creditors with knowledge that withholding taxes are due. Id. The individual's bad purpose or evil motive in failing to collect and pay the taxes, moreover,  'properly play[s] no part in the civil definition of willfulness.'  Id. (quoting Monday v. United States, 421 F.2d 1210, 1216 (7th Cir.), cert. denied, 400 U.S. 821, 91 S.Ct. 38, 27 L.Ed.2d 48 (1970)). 43 The Supreme Court cautions, however, that section 6672 cannot be construed to impose liability without fault. Slodov v. United States, 436 U.S. 238, 254, 98 S.Ct. 1778, 1789, 56 L.Ed.2d 251 (1978). Nor does mere negligence constitute willfulness under the statute. See Feist v. United States, 607 F.2d 954, 961, 221 Ct.Cl. 531 (1979). Rather, willfulness may be established by a showing of gross negligence involving a known risk of violation. Ruth, 823 F.2d at 1094. We have noted, moreover, that [w]illful conduct also includes failure to investigate or to correct mismanagement after having notice that withholding taxes have not been remitted to the Government. Kalb v. United States, 505 F.2d 506, 511 (2d Cir.1974), cert. denied, 421 U.S. 979, 95 S.Ct. 1981, 44 L.Ed.2d 471 (1975); see also Wright v. United States, 809 F.2d 425, 427 (7th Cir.1987) (articulating three part test to determine willfulness of taxpayer's inaction with respect to payment of withholding taxes). At a minimum, therefore, the willfulness element denotes a reckless disregard for obvious or known risks and the failure to pay withholding taxes must be voluntary, conscious and intentional--as opposed to accidental. Monday, 421 F.2d at 1215-16. 44 Here, Nancy's claim of ignorance regarding the financial affairs is insufficient to refute evidence that she was aware of the payroll aspects of the business including the need to pay withholding taxes. She and Ellison were the only officers of the corporation in which Nancy was the majority stockholder and she testified that she made sure that people got paid. She acknowledged that she occasionally signed checks. The magistrate judge found, moreover, that she was involved in virtually every other aspect of the business. 826 F.Supp. at 1490. Finally, Nancy admitted that she was aware that withholding taxes were due. Although the magistrate judge found that it was unclear from her testimony at what point in time she became aware of that obligation, he further found that there was no evidence to indicate that she made any effort to investigate or correct the problem. Id. In light of these findings and the evidence, we find it difficult to conclude other than that her failure to pay the withholding taxes was willful under the statute. Accordingly, we agree with the magistrate judge that Nancy is liable for the unpaid withholding taxes under section 6672.