Court Opinion

ID: 9487462
Source: CourtListenerOpinion
Date Created: 2023-08-05 12:17:10.047073+00
Date Added: 2024-06-11T17:52:17.009322
License: Public Domain

LEVAL, Circuit Judge,
concurring.
I concur in Judge Kearse’s excellent and thorough opinion, but write separately to underline the importance, in my view, of certain disputed facts. Rem testified that his mother, who chaired the board of directors and was the controlling shareholder of Princeton, exercised complete control and forbade him from paying the overdue withholding taxes. These facts might bear importantly on whether Rem should be found a “responsible person.”
While it is true that § 6672 concerns itself with the important goal of protecting trust funds owed to the United States by providing alternate sources from which to collect un-remitted taxes owed by a corporation on account of its employees, Congress refrained from imposing liability on all available targets. It did not, for example, impose liability on all officers, directors and stockholders of the delinquent corporation; it limited the liability to those persons in the corporation who bore responsibility for seeing to it that the tax payments were made. The statute thus provides, insofar as here relevant, that the liability would fall on persons “required to ... pay over” the delinquent tax, who willfully failed to do so. 26 U.S.C. § 6672 (1988).
In defining the standards for determining who falls within this statutory definition, courts developed the term “responsible persons” and concluded that their identification depends on whether they exercised “significant control” over the corporation’s finances. Fiataruolo v. United States, 8 F.3d 930, 939 (2d Cir.1993); Hochstein v. United States, 900 F.2d 543, 547 (2d Cir.1990); Ruth v. United States, 823 F.2d 1091, 1094 (7th Cir.1987); Gephart v. United States, 818 F.2d 469, 473 (6th Cir.1987). The point of the “significant control” inquiry is to determine whether the individual effectively exercised *647(or participated in the exercise of) sufficient power to cause the delinquent taxes to be paid, but failed to do so, using the Government’s money instead for other purposes. See Fiataruolo, 8 F.3d at 939.
Acknowledging the great importance of the ability of the Government to collect its revenue trust funds, we must also recognize the potentially inappropriate harshness of the “responsible person” remedy, if it is applied overbroadly and without care to insure that the person truly possessed the type of power necessary to justify it. The defendant in a suit under § 6672 is often an employee (as opposed to an owner) who has not personally benefitted from the misdirection of the Government’s funds. If the defendant furthermore had no influence over the decision as to what payments would be made, the imposition of a potentially huge liability can be both harsh and unfair.
In Unger v. United States, No. 90 Civ. 0384, 1994 WL 52574, 1994 U.S.Dist. LEXIS 1375 (S.D.N.Y. Feb. 10, 1994), Unger, who although a corporate officer, was likened by the district judge to “a cabin boy on a sinking ship,” was found liable for his corporate employer’s tax debt of over one million dollars. The district court granted summary judgment in the Government’s favor despite Un-ger’s testimony that the company’s sole shareholder, chief executive officer, and president exclusively made all decisions as to the payment of corporate funds, and rejected Unger’s urging to pay the taxes owing. Although the district judge deplored imposing liability, he read Hochstein to make irrelevant whether the defendant was barred by the orders of a superior from paying the taxes.
I do not understand that to be the holding of Hochstein. Hochstein’s employer, Safel-on, was insolvent and operating under the control of its factor Rosenthal, which periodically supplied operating funds for necessities. Hochstein was the controller; he received and paid out the funds infused by the factor, and was held liable for his failure to pay them to the IRS. Judge Newman, in dissent, argued that Hochstein had been forbidden by the factor to make the tax payment. The majority opinion holding Hochstein liable took pains to refute Judge Newman’s contention that Hochstein had been forbidden to pay the tax. It noted, “Because Ro-senthal did not specify the purposes for which the funds were to be used once they were given to Safelon, it is unclear how Hochstein’s payment of taxes could have amounted to noncompliance with Rosenthal’s instructions.” Hochstein, 900 F.2d at 548, n. 2. Although the majority opinion does not expressly assert how the judgment would have been affected had Hochstein received clear orders not to use the funds to pay the tax, the fact that it made a point of refuting Judge Newman’s suggestion rather strongly implies that the majority would have considered such orders pertinent.
The “core question” is “significant control.” Fiataruolo, 8 F.3d at 939. The power to sign cheeks and the holding of corporate office are indeed factors that courts have listed as helpful in deciding whether an individual possessed the necessary power, but they are only factors. Either can exist in circumstances where the individual in reality does not possess significant control over corporate finances. When this is so, the potentially devastating “responsible person” liability should not be imposed. Neither, however, may a person who truly participates in the exercise of that decisionmaking power hide behind technicalities to avoid responsibility.
If, despite his corporate title, Rem establishes at trial that he was totally subordinate to the orders of his mother, who chaired the board and was Princeton’s principle shareholder, and that she exercised complete control over payments and directed that the taxes not be paid, Rem might satisfy the factfinder that he did not have significant control and is therefore not a responsible person under Section 6672.