Court Opinion

ID: 222168
Source: CourtListenerOpinion
Date Created: 2011-07-29 19:05:56+00
Date Added: 2024-06-11T11:25:53.310761
License: Public Domain

UNPUBLISHED

                   UNITED STATES COURT OF APPEALS
                       FOR THE FOURTH CIRCUIT

                               No. 10-2326

ROBERT A. NEWBILL,

                 Plaintiff - Appellant,

          v.

UNITED STATES OF AMERICA,

                 Defendant - Appellee.

Appeal from the United States District Court for the Eastern
District of Virginia, at Alexandria. Gerald Bruce Lee, District
Judge. (1:10-cv-00041-GBL-TCB)

Submitted:     June 14, 2011                   Decided:    July 29, 2011

Before TRAXLER,    Chief   Judge,   and   NIEMEYER   and   KING,   Circuit
Judges.

Affirmed in part, vacated in part, and remanded by unpublished
per curiam opinion.

Raymond D. Battocchi, Charles Davenport, GABELER BATTOCCHI &
POWELL, PC, McLean, Virginia, for Appellant.         Gilbert S.
Rothenberg, Acting Deputy Assistant Attorney General, Bridget M.
Rowan, Kathleen E. Lyon, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C.; Neil H. MacBride, United States Attorney,
Alexandria, Virginia, for Appellee.

Unpublished opinions are not binding precedent in this circuit.
PER CURIAM:

            Robert A. Newbill appeals from the district court‟s

order   granting    summary      judgment      to   the    United      States        (“the

government”) on Newbill‟s claim for a refund of the penalty

assessed    against      him    under    26    U.S.C.      §    6672     for    payroll

withholding taxes owed by New Construction, Inc. (“NCI”), and

directing the entry of a judgment against him for the disputed

amount.     For the reasons that follow, we affirm the district

court‟s award of summary judgment to the government; however, we

vacate the monetary judgment against Newbill.

                                         I.

            The facts material to whether Newbill is liable under §

6672 are undisputed.           Newbill was the president, treasurer, and

majority shareholder of NCI, a construction company with over

300 employees and annual revenues of approximately $40,000,000

as of late 2003.         As president of NCI, Newbill was responsible

for many aspects of NCI‟s operations: he controlled employee

compensation; had signature authority on NCI‟s bank accounts;

made day-to-day financial decisions for NCI; and negotiated and

executed contracts for NCI.

            Among the agreements that Newbill entered on behalf of

NCI   was   a   promissory      note    in    favor   of       Wachovia    Bank       that

supplied    NCI   with    a    $2,500,000      line   of       credit.         The    note

                                         2
provided that upon NCI‟s default, Wachovia could terminate the

line of credit, require immediate repayment of the loan, and

foreclose its security interest in the bank account that NCI

maintained     with    Wachovia.         Newbill       also    executed    a     surety

agreement with Atlantic Mutual Companies under which Atlantic

guaranteed NCI‟s performance of certain construction contracts.

In the event that NCI was unable to meet its obligations under

these    contracts,     the    agreement       essentially       required       NCI    to

assign   its     interests    in   all    of    its    assets     to    Atlantic      and

permitted Atlantic to take joint control over NCI‟s affairs.

            In     November    2003,     NCI    was    “in     difficult   financial

straits.”      J.A. 90.       On November 21, 2003, Wachovia terminated

NCI‟s line of credit and seized the balance of NCI‟s Wachovia

account pursuant to the terms of the promissory note.                      From that

point forward, Wachovia only released funds to NCI for pre-

approved purposes.        On November 24, 2003, Atlantic assumed joint

control over NCI‟s assets and operations under the terms of the

surety   agreement.        Thereafter,         all    NCI    receipts    were    to    be

applied toward NCI‟s obligations under the surety agreement.                           In

December 2003, NCI and Atlantic entered into a “Joint Control

Trust Agreement,” which memorialized the terms under which the

companies    had    operated    since     November       24,    2003.      The   joint

control agreement stipulated the procedure for payment of NCI‟s

expenses,      including      payroll     and        withholding       taxes.         The

                                          3
agreement also recognized NCI‟s account with Cardinal Bank as

the joint control trust checking account.                               All charges against

the Cardinal account required a                         signature from both NCI and

Atlantic; Newbill was a signatory on the account.

              Between November 26, 2003 and January 6, 2004, NCI

failed to remit to the IRS taxes withheld from employees‟ wages

for five payroll periods.                       Newbill first became aware of these

unpaid taxes on December 17, 2003.                            After that date, Newbill

signed      over     $100,000           worth      of      checks       to   non-governmental

creditors that were drawn on the Cardinal account.                                      By early

2004,       NCI     had        ceased       operations         and      entered        bankruptcy

proceedings.

              The     Internal             Revenue      Service      (“IRS”)      subsequently

assessed      Newbill          a    100%    penalty        under   26    U.S.C.    §    6672   for

$141,093.40—the total amount of withholding taxes owed by NCI.

Newbill      paid    a     portion         of    the    assessment       and   commenced       the

instant suit for a refund of $99,566.43, claiming that he was

not     a    “responsible             person”        who     willfully       failed      to    pay

employment withholding taxes within the meaning of § 6672.                                     The

government and Newbill filed cross motions for summary judgment.

The    district      court          denied      Newbill‟s      motion,       granted     summary

judgment to the government, and entered judgment against Newbill

in    the   amount        of       $99,566.43.          Newbill      appeals      the   district

court‟s ruling, arguing that the district court erred by: (1)

                                                   4
holding that Newbill was responsible for the payment of the

taxes in question; (2) holding that Newbill willfully failed to

pay those taxes; and (3) entering a judgment against Newbill for

the disputed amount.

                                     II.

            We review a district court‟s grant of summary judgment

to the government de novo, resolving all factual disputes in

favor of the taxpayer.        See Erwin v. United States, 591 F.3d

313, 319 (4th Cir. 2010).          “[T]o defeat summary judgment, the

taxpayer (like any other litigant) must identify an error of law

or a genuine issue of material fact; the taxpayer cannot create

a material fact by reliance on conclusory allegations or bare

denials.”     Id.     Although the facts are crucial in a § 6672

analysis, “extensive caselaw narrowly constrains a factfinder‟s

province in § 6672 cases.”         Id. at 320 (quoting Barnett v. IRS,

988 F.2d 1449, 1454 (5th Cir. 1993)) (internal quotation marks

and   alterations     omitted).      Therefore,   “in   the   absence   of

disputed material facts, summary judgment represents a favored

mechanism    to     secure   the    „just,   speedy,    and   inexpensive

determination‟” of § 6672 liability.         Plett v. United States, 185

F.3d 216, 223 (4th Cir. 1999) (quoting Fed. R. Civ. P. 1).

                                      5
                                       III.

              The   Internal     Revenue       Code   requires   employers     to

withhold certain taxes from the wages of their employees and pay

the    withheld     sums   to   the   United    States.    See   26   U.S.C.   §§

3402(a), 3102(a).          Courts commonly refer to these amounts as

“trust fund taxes” because the employer holds the withheld taxes

in trust for the United States.              See 26 U.S.C. § 7501(a); Slodov

v. United States, 436 U.S. 238, 243 (1978); Plett, 185 F.3d at

218.       The funds “exist for the exclusive use of the government,

not the employer,” and may not be used to pay the employer‟s

business expenses.         Erwin, 591 F.3d at 319; see also Brewery,

Inc. v. United States, 33 F.3d 589, 593 (6th Cir. 1994).                  If an

employer withholds trust fund taxes but fails to remit them to

the government, § 6672 imposes personal liability for the amount

of taxes owed upon “those officers or employees (1) responsible

for collecting, accounting for, and remitting payroll taxes, and

(2) who willfully fail to do so.”1               Plett, 185 F.3d at 218; see

       1
           Section 6672 provides, in pertinent part:

       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.
(Continued)
                                         6
also    26   U.S.C.    §    6672(a).         After     the    government      assesses   a

taxpayer for § 6672 liability, the taxpayer has the burden of

proof as to both elements at trial.                          See O‟Connor v. United

States, 956 F.2d 48, 50 (4th Cir. 1992).                          The taxpayer must

therefore prove that he was not a responsible person and that

any failure to pay the taxes was not willful.                           See Erwin, 591

F.3d at 319.

             Courts    refer        to   a   party     contemplated      in   the   first

element of § 6672 liability as a “responsible person.”                         O‟Connor,

956 F.2d at 50.              This term “is broad and may include many

individuals connected with a corporation;” therefore “more than

one individual may be the responsible person for an employer.”

Id.     The “key element” for ascertaining whether a party is a

responsible person “is whether that person has the statutorily

imposed duty to make the tax payments.”                          Id.    at 51.       This

inquiry      focuses       on   “whether          an   officer     or     employee       so

participated in decisions concerning payment of creditors and

disbursement of funds that he effectively had the authority—and

hence    a   duty—to       ensure    payment      of   the    corporation‟s      payroll

taxes.”      Plett, 185 F.3d at 219 (internal quotation marks and

alterations omitted).           “Put another way, the essential inquiry

26 U.S.C. § 6672(a).

                                              7
is    whether    a     person    has    significant,      but   not    necessarily

exclusive,      authority       over    corporate    finances     or    management

decisions.”      Erwin, 591 F.3d at 321.            We have developed a non-

exhaustive      list    of   factors     to    inform     our   determination   of

responsible person status under § 6672: “whether the employee (1)

served as an officer or director of the company; (2) controlled

the company‟s payroll; (3) determined which creditors to pay and

when to pay them; (4) participated in the corporation‟s day-to-

day management; (5) had the ability to hire and fire employees;

and (6) possessed the power to write checks.”                      Id.; see also

Plett, 185 F.3d at 219; O‟Connor, 956 F.2d at 51.

            The second element of § 6672 liability—willful failure

to pay trust fund taxes—requires either “knowledge of nonpayment

or reckless disregard of whether the payments were being made.”

Turpin v. United States, 970 F.2d 1344, 1347 (4th Cir. 1992)

(internal    quotation       marks     omitted).     “A    responsible    person‟s

intentional preference of other creditors over the United States

establishes the element of willfulness under § 6672(a).”                    Plett,

185 F.3d at 219.         “[S]uch an intentional preference occurs when

the   responsible       person   knows    of   or   recklessly     disregards   an

unpaid deficiency.”          Erwin, 591 F.3d at 325; see also Turpin,

970 F.2d at 1347.            “[W]hen a responsible person learns that

withholding taxes have gone unpaid . . . he has a duty to use

                                          8
all   current    and    future     unencumbered        funds      available   to    the

corporation to pay those back taxes.”                 Erwin, 591 F.3d at 326.

           Mindful of these principles, we turn to the substance

of Newbill‟s appeal.             We briefly consider his three primary

arguments in turn.2

                                          IV.

                                           A.

           Newbill first contends that the district court erred

by holding as a matter of law that Newbill was responsible for

the payment of NCI‟s payroll taxes.                 We disagree.

           The       undisputed    facts       of   this   case    demonstrate     that

Newbill   was    a    “responsible    person”        for   §   6672   purposes     with

respect   to    NCI‟s     trust    fund     taxes.         The    district    court‟s

analysis of the responsible person factors correctly established

that five of the six factors are present here: (1) as president

and treasurer of NCI, Newbill was an officer of the company; (2)

Newbill controlled NCI‟s payroll because he used his signature

authority on NCI‟s bank accounts to issue payroll checks on

several   occasions       during     the        relevant    period;    (3)    Newbill

      2
        Our disposition of Newbill‟s substantive contentions
obviates the need to address Newbill‟s arguments regarding
attorneys‟ fees.

                                           9
determined        which     creditors       to       pay     because              he        signed      and

disbursed       payroll         checks     and       checks            to     other           creditors

throughout        the      relevant        period;               (4)        Newbill              actively

participated       in     the     day-to-day         management              of    NCI;          and    (5)

Newbill had, and exercised, the power to sign checks from NCI‟s

bank accounts.            Although not every factor points to Newbill‟s

responsibility,         most      do.      We       are     therefore             satisfied            that

Newbill    “effectively           had    the     authority—and                hence          a    duty—to

ensure payment of [NCI]‟s payroll taxes.”                                   Plett, 185 F.3d at

219.

            Newbill‟s           argument        that        he     had        no        “significant

authority”      over      NCI‟s      management        or    finances             after          Wachovia

seized    the     balance       of    NCI‟s      Wachovia          account             and       Atlantic

assumed joint control over NCI‟s operations is unavailing.                                              See

Erwin, 591 F.3d at 321.              Both Wachovia and Atlantic acquired the

right to exercise control over NCI‟s finances through voluntary

contractual agreements that Newbill personally negotiated and

willingly executed on behalf of NCI.                         The agreements delegated

authority over certain aspects of NCI‟s affairs to Wachovia and

Atlantic     in     the     event       that     NCI       was     unable              to     meet      its

obligations.         However,         “delegation           will       not        relieve         one   of

responsibility” in the § 6672 context.                             Id. at 322 (internal

quotation    marks        omitted);      see     also       id.        at    321       (noting         that

responsible       person‟s        authority         over     company‟s             management            or

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finances need not be exclusive); Bradshaw v. United States, 83

F.3d     1175,    1181    (10th      Cir.        1995)    (holding      that    company

president, who negotiated company‟s lending agreement with bank,

could not avoid responsibility under § 6672 “by ceding to the

Bank the right to exert financial control over [the company]”

pursuant to that agreement); Commonwealth Nat‟l Bank of Dallas

v. United States, 665 F.2d 743, 757 (5th Cir. 1982) (holding

that company president was responsible for payment of company‟s

trust    fund     taxes   notwithstanding           lending     bank‟s       “extensive”

control over payment of creditors).

              Furthermore,     although            Newbill      did      not     possess

unilateral authority to issue checks after Atlantic gained joint

control, neither did Atlantic.               Signatures from both Newbill and

Atlantic were required for Cardinal Bank to honor checks drawn

on NCI‟s joint control trust account.                     Newbill thus could have

exercised considerable power over the payment of NCI‟s creditors

by   simply      withholding   his     countersignature.                “[A]    person‟s

„duty‟ under § 6672 must be viewed in light of his power to

compel or prohibit the allocation of corporate funds.”                           Godfrey

v. United States, 748 F.2d 1568, 1576 (Fed. Cir. 1984) (emphasis

added) (holding that where person has authority to sign company

checks    or     “prevent    their     issuance          by   denying    a     necessary

signature . . . he will generally be held „responsible‟” under §

6672); see also United States v. Kim, 111 F.3d 1351, 1362 (7th

                                            11
Cir.     1997)    (holding      that    responsibility           under    §    6672    only

requires that “the individual could have impeded the flow of

business to the extent necessary to prevent the corporation from

squandering the taxes it withheld from its employees” (internal

quotation marks omitted)).              For these reasons, we conclude that

Newbill was responsible for the payment of NCI‟s trust fund

taxes.

                                            B.

            Newbill next argues that the district court erred by

holding as a matter of law that he willfully failed to pay NCI‟s

trust fund taxes.          We disagree.

            The     record,      viewed     in    the    light    most    favorable      to

Newbill, demonstrates that Newbill had actual knowledge of NCI‟s

tax deficiencies on December 17, 2003.                    As of that date, Newbill

had a duty to use all of NCI‟s unencumbered funds to pay the

overdue taxes.           See Erwin, 591 F.3d at 326.             Instead of ensuring

payment of the taxes however, Newbill signed over $100,000 worth

of checks to NCI employees and creditors after December 17,

2003.     It is undisputed that Newbill could have prevented this

allocation of NCI funds by withholding his signature from the

checks.          Thus,     by   signing     the     checks       to   non-governmental

creditors    after        learning     of   NCI‟s       unpaid    trust       fund   taxes,

Newbill intentionally preferred those creditors over the United

                                            12
States.    See Plett, 185 F.3d at 219.          We therefore conclude as a

matter of law that Newbill willfully failed to pay NCI‟s trust

fund taxes.

                                       C.

           Newbill also contends that the district court erred by

entering   a   judgment    against    him   for   the     disputed    amount   of

$99,566.43,    which      he   had    already     paid,     thus     effectively

requiring him to pay that portion of the penalty twice.                        We

agree.

           The government acknowledges that Newbill paid the IRS

approximately $99,000 towards the assessment prior to commencing

this action for a refund.            The government also admits that it

did not attempt to collect the balance of the assessment in the

instant suit.      Accordingly, the government concedes that the

district court‟s “judgment should be amended to provide, simply,

for the dismissal of taxpayer‟s refund suit” rather than the

entry of a monetary judgment against Newbill.                Br. of Appellee

at 63 n.18.      We therefore conclude that it was error for the

district court to enter judgment against Newbill in the amount

of $99,566.43.

                                       13
                                        V.

            For    the    foregoing     reasons     we    affirm    the   district

court‟s    award   of     summary   judgment   to    the       United   States   and

vacate the judgment against Newbill in the amount of $99,566.43.

We remand the case to the district court for the limited purpose

of entry of final judgment consistent with this opinion.                         We

dispense    with    oral     argument     because        the    facts   and   legal

contentions are adequately presented in the materials before the

court and argument would not aid in the decisional process.

                         AFFIRMED IN PART, VACATED IN PART, AND REMANDED

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