Opinion ID: 6984410
Heading Depth: 2
Heading Rank: 5

Heading: The Counterclaim Defendants’ Willfulness

Text: As their penultimate argument, the Counterclaim Defendants contend that they did not act willfully in failing to remit Atlas’s withholding taxes. The question of willfulness in this context is normally one of fact. Hochstein, 900 F.2d at 548. Therefore, a court may determine a party’s willfulness as a matter of law only when the facts are undisputed and application of the law to those facts will reasonably support only one ultimate conclusion. Richardson v. New York State Dep’t of Correctional Serv., 180 F.3d 426, 437-38 (2d Cir.1999). Of course, in determining whether genuine disputes of fact exist, we must view the facts in the light most favorable to the non-moving party. Anderson, 477 U.S. at 255, 106 S.Ct. 2505. In arguing that they did not act willfully within the meaning of section 6672(a), the Counterclaim Defendants do not contend that they had no knowledge of Atlas’s obligation to remit withholding taxes. Nor do they assert that they lacked knowledge that Astro’s remaining funds were used to pay creditors other than the IRS. Instead, they argue that they reasonably believed that Atlas had satisfied its tax obligations through application of credits from prior quarters. In support of this argument, they point to evidence which, if credited, demonstrates that: (1) in 1985, Servisco represented to Astro that Atlas Guard had a tax credit of over $114,000 and that Penn was current in its withholding obligations; (2) prior to June 1988, the IRS did not act on Atlas’s longstanding claim for a refund, despite Atlas’s repeated requests that it do so; (3) in fact, the IRS confirmed the existence of the credit when, in September 1986, it sent Atlas reconciliation worksheets indicating that Atlas Guard had overpaid its withholding taxes by over $114,000 in 1984; (4) relying on this representation, Atlas applied the credit against its withholding liability for the last quarter of 1986 and the first quarter of 1987, consistent with the instructions on its Employer’s Quarterly Federal Tax Return Form 941; but (5) it was not until July 1988 that the IRS first informed the Counterclaim Defendants that the credit did not exist, and by that time Astro had used all of the proceeds of the sale of Atlas to pay other creditors. The government, in turn, does not take issue with the assertions that the IRS credited Atlas Guard’s account in 1984, confirmed the existence of that credit, and failed to inform Atlas of either mistake until July 1988. Nor does the government dispute that, had the credit actually existed, Atlas would have been within its rights in applying the credit to its withholding tax liabilities for the last quarter of 1986 and the first quarter of 1987. In fact, at oral argument, the government conceded that “there is no question” that Atlas could have satisfied its liabilities by applying any credit that was actually in its account. Instead, the government first argues that Atlas did not actually believe that its taxes were being paid. In addition, the government contends that any such belief would have been unreasonable as a matter of law. 4 Thus, the argument continues, the reasonable cause exception is inapplicable here. In support of its argument that the Counterclaim Defendants did not actually believe that Atlas’s withholding taxes were being paid, the government relies primarily on the deposition testimony of Steven Romer. In his deposition, Romer explained why Atlas applied the credit rather than waiting for a refund: The only thing we could assume is that the IRS, which happens to fly around like a dukey bird until it flies up its own backside, had somehow gotten into its head it’s not going to pay us this money. So the doctrine of self-help said we were in every way, shape and form entitled to apply ... what was rightfully ours, to an indebtedness to the IRS and we did that. Viewed in the light most favorable to the government, Romer’s deposition statement can be taken as an admission that the Counterclaim Defendants knew that the IRS had determined that Atlas had no credit and was due no refund, but that Atlas nonetheless decided to apply the nonexistent credit against its tax liabilities. As a result, a reasonable factfinder could conclude, as the government contends, that Atlas did not believe that its withholding taxes were being paid. On the other hand, viewing this and all of the other evidence in the light most favorable to the Counterclaim Defendants, and drawing all reasonable inferences in their favor, Steven Romer’s statement must be read not as an admission that Atlas knew that the taxes were not being paid, but as an expression of Atlas’s intent to use lawful means to receive a credit that the IRS had acknowledged as late as September 1986, but, for unknown reasons apart from the validity of the credit, had not yet refunded. In short, a reasonable factfinder could also conclude, as the Counterclaim Defendants contend, that Atlas did believe that its taxes were being paid. If a material factual issue “may reasonably be resolved in favor of either party,” a court may not grant summary judgment. Anderson, 477 U.S. at 250-51, 106 S.Ct. 2505; see also Richardson, 180 F.3d at 437-38. Thus, the district court erred in finding as a matter of law that Atlas did not believe that its taxes were, in fact, being paid. In its final argument in support of the district court’s willfulness finding, the government relies on Kalb, 505 F.2d at 506, for the proposition that even if the Counterclaim Defendants did believe that Atlas’s taxes were being paid, that belief was still unreasonable as a matter of law. In Kalb, the responsible persons requested the IRS to apply their employer’s overpayment of income taxes to reduce its withholding tax liability. Kalb, 505 F.2d at 509. The IRS refused to honor their request, the withholding taxes went unpaid, and the IRS assessed a penalty against the responsible persons pursuant to section 6672(a). Id. The responsible persons argued that they did not willfully fail to remit withholding taxes because they reasonably believed that the IRS would apply their employer’s income tax overpayment against its withholding tax liability. Id. We declined to apply the reasonable cause exception, finding that the employer did not have the power to direct the IRS to apply its previous overpayment against its current liability, id. at 509, and that the IRS “at no time indicated that the overpayment would be [so] applied,” id. at 510. Here, in stark contrast to Kalb, the government conceded at oral argument that “there is no question” that Atlas could have applied any existing withholding tax credit against its withholding tax liabilities. Moreover, the government does not dispute Atlas’s contention that the IRS actually, if erroneously, confirmed the existence and the amount of the credit. Instead, the government only disputes the date on which the IRS forwarded this confirmation to Atlas, asserting that the IRS prepared and sent Atlas the reconciliation forms in the summer of 1984, rather than September 1986. The district court found this dispute to be immaterial to the outcome of the case. We disagree. “[Disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment.” Anderson, 477 U.S. at 248, 106 S.Ct. 2505. If, as Atlas claims, the IRS confirmed the existence and amount of the credit as late as September 1986 — only weeks before the final quarter of 1986 began — this fact militates strongly in favor of a finding that Atlas acted reasonably when, just months later, it applied that credit to fulfill its withholding obligations for the last quarter of 1986 and the first quarter of 1987. But if, as the government contends, the IRS prepared and issued the reconciliation sheets as early as the summer of 1984 but then failed to grant Atlas’s requested refund for nearly three years, the reconciliation sheets provide significantly less support for the proposition that Atlas acted reasonably in applying the credit without further investigating the source of the IRS’s delay. See Landau, 155 F.3d at 101 (willful conduct may include reckless disregard for obvious or known risks). Because resolution of this dispute might affect the outcome of the factfinder’s reasonableness determination, the district court erred in finding it immaterial. See Anderson, 477 U.S. at 248, 106 S.Ct. 2505. In sum, the evidence introduced by the parties on the question of willfulness is conflicting and susceptible of at least two reasonable interpretations. As a result, the district court erred in finding as a matter of law that the Counterclaim Defendants acted willfully as required by section 6672(a). By the same token, the district court did not err in declining the Counterclaim Defendants’ invitation to find their actions not willful as a matter of law.