Opinion ID: 683548
Heading Depth: 1
Heading Rank: 1

Heading: Denied Motions for Judgment as a Matter of Law

Text: 6 Mr. Thomas, Ms. Thomas, and Giles all raise the issue of whether the district court erred in refusing to find that they were neither responsible nor willful as a matter of law with regard to section 6672 of the Internal Revenue Code (26 U.S.C. Sec. 6672). Because they involve only questions of law, we review motions for judgment as a matter of law de novo. Bowlen v. United States, 956 F.2d 723, 727 (7th Cir.1992); see Tapia v. City of Greenwood, 965 F.2d 336, 338 (7th Cir.1992). We will reverse the district court's denial of the motions for judgment as a matter of law and motions for judgment after trial only if we conclude that a reasonable juror could not have found appellants responsible or willful based on the evidence admitted at trial viewed in the light most favorable to the government. Bowlen, 956 F.2d at 727; Tapia, 965 F.2d at 338. 7 The Internal Revenue Code of 1986 requires employers to withhold federal Social Security and income taxes from the wages of their employees and to hold those taxes in trust for the government. 26 U.S.C. Secs. 3102, 3402. Employers must report and pay the taxes they withhold quarterly. Congress enacted section 6672(a) of the Code to protect against employers' squandering this trust fund. Section 6672(a) provides that 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 shall be subject to a one hundred percent penalty equal to the total amount of the unpaid taxes. 26 U.S.C. Sec. 6672(a). The Supreme Court has interpreted this statute to impose liability on any person who fails to perform his duty to collect, account for, or pay over the withholding taxes. Slodov v. United States, 436 U.S. 238, 247, 250, 98 S.Ct. 1778, 1785, 1787, 56 L.Ed.2d 251 (1978). 8 A person must be both responsible and wilful to be liable for an employer's failure to collect or pay over trust fund taxes to the United States. Bowlen, 956 F.2d at 727. Once the government has assessed a taxpayer for the nonpayment of taxes under section 6672, the taxpayer bears the burdens of production and persuasion to disprove his status as a responsible person who willfully failed to collect, account for, or pay over the taxes. Ruth v. United States, 823 F.2d 1091 (7th Cir.1987). 9 A taxpayer can be held liable as a responsible person under section 6672 in this circuit if he retains sufficient control of corporate finances that he can allocate corporate funds to pay the corporation's other debts in preference to the corporation's withholding tax obligations. Bowlen, 956 F.2d at 728. Having significant control does not mean having exclusive control over the disbursal of funds or the final say over whether taxes or bills are paid. Id. More than one taxpayer can be a responsible person in a given instance. Id. The concept of responsibility in this context does not focus on whether a particular taxpayer could himself have paid the taxes; rather, it focuses on whether the taxpayer could have impeded the flow of business to the extent necessary to prevent the corporation from squandering the taxes it withheld from its employees. See id. (noting that responsibility under section 6672 encompasses all those connected closely enough with the business to prevent the default from occurring.). Indicia of a responsible person include possessing checkwriting authority (and the converse authority to refuse to write checks), id., and holding a corporate office, see Monday v. United States, 421 F.2d 1210, 1214-15 (7th Cir.1970), cert. denied, 400 U.S. 821, 91 S.Ct. 38, 27 L.Ed.2d 48 (1970) (noting that holding corporate office does not per se impose a duty, but that an officer may have such a duty even if he is not the disbursing officer so long as he otherwise has sufficient power within the corporate structure). 10 Willful, as the term is used in section 6672, means voluntary, conscious and intentional--as opposed to accidental--decisions not to remit funds properly withheld to the government. Monday, 421 F.2d at 1216 (citations omitted). Furthermore, willful in this civil context does not mean possessing a specific fraudulent intent or evil motive. Id.; Domanus v. United States, 961 F.2d 1323, 1326 (7th Cir.1992). A responsible person willfully fails to remit withheld taxes to the government if he pays other creditors after he knows of the employer's failure to pay the withheld funds to the government. Garsky v. United States, 600 F.2d 86, 91 (7th Cir.1979). Indeed, a responsible person satisfies the willful standard if he recklessly disregards a known risk that the trust funds may not be paid to the government. Id. Lacy Thomas and Colette Thomas 11 The government produced evidence at trial to show that Mr. Thomas and Ms. Thomas each served as Mile Square's Assistant Vice-President and Controller (though Ms. Thomas followed Mr. Thomas and was only the acting Vice-President and Controller). In those roles they supervised Mile Square's accounting, finance, and payroll activities. They prepared and issued the payroll, prepared and filed employment tax returns, and prepared monthly financial reports for the Mile Square Board of Directors. They had the authority to sign checks for less than $1,000, to co-sign checks above $1,000, to determine whether and when bills for under $1,000 would be paid, to prioritize the payment of bills exceeding $1,000, and to hire and fire personnel within their chains of command (though Mr. Cantrell may have had at least perfunctory approval power over hirings and firings). Each admits knowing that, during the periods for which they were assessed (the third quarter of 1987 for Mr. Thomas and the first three quarters of 1988 for Ms. Thomas), Mile Square was failing to pay its withholding taxes. Despite this knowledge, they allowed Mile Square to meet its payroll, signed checks in amounts up to $1,000, and co-signed checks exceeding $1,000. 12 These facts provide the basis for a reasonable person to conclude that both Mr. Thomas and Ms. Thomas could have impeded the functioning of Mile Square by refusing to sign and co-sign checks and by refusing to allow payroll to go forward until Mile Square paid the government the taxes it had withheld from the wages of its employees. Accordingly, these facts support the conclusion that Mr. Thomas and Ms. Thomas were responsible persons within the meaning of section 6672. They also substantiate a finding that Mr. Thomas and Ms. Thomas acted willfully: each knew of Mile Square's failure to pay over the withheld taxes, yet each paid other creditors anyway. 13 Mr. Thomas and Ms. Thomas hang their hats on the argument that section 6672 should not require taxpayers who might otherwise be responsible persons to disobey direct orders from their superiors not to pay the withheld taxes to the government. They direct us to Graunke v. United States, 711 F.Supp. 388 (N.D.Ill.1989) for the argument that section 6672 does not require responsible persons to disobey direct orders of superiors in order to avoid liability. Indeed, they argue that F. Daniel Cantrell, the president and CEO of Mile Square and Mr. Thomas' and Ms. Thomas' immediate superior, made the final decisions regarding which creditors to pay. Mr. Thomas argued that he discussed with Cantrell the importance of paying the taxes, prepared checks for Cantrell's signature, and gave first priority to the taxes (Mr. Thomas alone did not have the authority to pay the taxes), but Cantrell then refused to sign the checks as the taxes became due. Ms. Thomas argued that she felt she had very little power to influence the payment of the taxes. She succeeded Mr. Thomas, but felt she had little job security because she was only the Acting Controller. Also, Cantrell had forbidden her to talk to the members of Mile Square's Board. Both Mr. Thomas and Ms. Thomas recognized that Cantrell would veto any attempt to pay the taxes that Mile Square owed the government. Mr. Thomas eventually quit after the third quarter of 1987 as a result of Cantrell's recalcitrance; Ms. Thomas feared she would lose her job if she tried to contravene Cantrell's authority. These facts demonstrate that section 6672 is a tough statute, but they do not absolve either Mr. Thomas or Ms. Thomas of liability. 14 Graunke involved a taxpayer (Graunke) who worked at the Heritage Cabinet company under Heritage's sole stockholder, Curcio. Id. Both Graunke and Curcio had check-writing authority. Id. When Heritage failed to pay its withholding taxes, the government assessed a penalty against Graunke, who argued that he had limited authority and that Curcio made all financial and employment decisions, including which creditors to pay. Id. Graunke paid only the bills Curcio directed him to pay. Id. The district court held that Graunke was not a responsible person as a matter of law, concluding that it does not appear that the law has gone so far as to require that a person must disregard checkwriting instructions in order to avoid liability. Id. at 394. 15 The district court in Graunke based its decision on a case from the Tenth Circuit, Jay v. United States, 865 F.2d 1175 (10th Cir.1989). Jay involved a taxpayer who worked as a bookkeeper for a company that did not pay its withholding taxes. Id. at 1176. The taxpayer, Jay, was aware of policy decisions by the corporation's executives, signed corporate checks and paid bills to creditors from the corporation's bank account, which included funds withheld from employees' wages. Id. But Jay acted according to the instructions from his boss, Helmuth, as to which major bills to pay. Id. Helmuth testified that he decided whether to prefer other creditors to the United States. Id. at 1177. At trial, the government moved for, and the district court granted, summary judgment against Jay. Id. at 1176. On appeal Jay defended himself on the ground that he was not a responsible person. Id. at 1177. The Tenth Circuit reversed, concluding that This is not a case where the taxpayer necessarily possessed authority to pay all bills ...; nor did Jay receive generalized instructions on priorities.... Here, the president and general manager of the corporation specifically told Jay to pay other creditors, not the United States. Id. at 1179 (citations omitted). Most notably for our purposes, however, the court refused to find as a matter of law that Jay was not liable: We do not hold that Jay is absolved of liability. Id. The Tenth Circuit remanded the case for a trial on the merits so that a jury could decide whether Jay was a responsible person under section 6672. 16 Jay stands for the proposition that signing checks only at the direction of one's superior does not alone make one a responsible person for purposes of section 6672. See id. Appellants essentially argue that we should not only adopt Jay as the law in this circuit, but that we should also extend its holding, through Graunke, to preclude liability where the taxpayer shows that he took direction from a superior in writing checks to creditors in preference to the government. This we decline to do. As we are not reviewing a summary disposition in the government's favor, we do not have occasion to pass on Jay 's validity in this circuit. Moreover, Graunke is unpersuasive to the extent it applies the holding of Jay to preclude the liability of those who show that a superior limited their checkwriting authority. 1 These are facts that the appropriate trier must sift and weigh. In this case, the jury heard testimony regarding Mr. Thomas' and Ms. Thomas' helpless, subservient roles in Mile Square and still found that they were responsible and willful. There was plenty of evidence for the jury reasonably to reach this verdict; each appellant prepared and issued Mile Square's payroll, supervised finance and accounting, prepared and filed employment tax returns, possessed the power to sign checks alone for less than $1,000 and to co-sign checks for over $1,000, prioritized the payment of bills in excess of $1,000 and was principally responsible for paying vendors. 17 It is true that Lacy Thomas eventually quit Mile Square when he realized he could not prevent Mile Square from defaulting on its tax obligations. He departed, however, only after he had seen on a weekly basis for three months that Cantrell would not pay the withholding taxes. He simply waited too long to quit to shield himself from liability as a matter of law. Had he quit immediately upon learning of Cantrell's recalcitrance, or even shortly thereafter, we might find differently. According to the facts before us, however, the district court did not err in refusing to grant Mr. Thomas' and Ms. Thomas' motions for judgment as a matter of law or judgment after trial. Percy Giles 18 As the volunteer Treasurer of Mile Square, Percy Giles was ex officio Chairman of the Mile Square Finance and Planning Committee. He also could co-sign large checks. He had the opportunity to attend meetings where corporation officers discussed Mile Square's tough financial straits and presented committee members with packets of information detailing Mile Square's receipts and expenditures. Percy Giles was a busy man during the third and fourth quarters of 1987 and the first three quarters of 1988. He was elected Alderman of Chicago's 37th Ward in a March 1986 special election and had to run again for his seat in February 1988. As Alderman, Giles worked about twelve hours per day. And as a consequence of his busy schedule, Giles was not able to attend many Board meetings. Moreover, when he ran finance committee meetings, Giles merely followed an agenda that Cantrell had prepared for him. Giles claims that he did not know about Mile Square's failure to pay withholding taxes because he did not have time to review finance reports prepared for the committee. In fact, Mr. Giles was so busy as Alderman he claims he did not even notice that Mile Square's payroll checks bore his signature. 19 Giles argues that he did not have much real authority as Treasurer and Finance Committee Chair of Mile Square. He attempted at trial to impress upon the jury that, although he had limited check-signing authority, he never used that authority to the extent necessary to make him a responsible and willful taxpayer. But the jury was not impressed, and neither are we. 20 Like Ms. Thomas and Mr. Thomas, Giles may not seek refuge from liability as a matter of law under the tent of Cantrell's authority. Giles signed enough checks to convince the jury that he was both responsible and willful. He also had the authority, though he may not have exercised it, to direct the Finance Committee toward solving Mile Square's tax problems. And he accompanied Cantrell to a bank to get financing for Mile Square. His claims that he did not read the financial reports that Cantrell and others prepared for the Board or know that Mile Square's payroll checks bore his signature do not diminish Giles' liability. 21 We have ruled that a  'responsible person' is liable if he (1) clearly ought to have known 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 very easily. Wright v. United States, 809 F.2d 425, 427 (7th Cir.1987). The jury in this case reasonably concluded that, even if Giles did not know about Mile Square's failure to pay withholding taxes, he clearly should have known because he was Treasurer and Finance Chairman and because he could have learned very easily by reviewing the finance reports Cantrell and others prepared for him. Giles' claimed ignorance regarding his signature on payroll checks does not indicate his lack of responsibility; rather, it highlights a lack of reasonable diligence with respect to his duties at Mile Square. The jury reasonably found this lack of diligence inexcusable in the face of Mile Square's obligations to the government. The district court did not err in refusing to grant Percy Giles' motions for judgment as a matter of law or judgment after trial.