Schiffmann v. United States , 811 F.3d 519 ( 2016 )

United States Court of Appeals
For the First Circuit
No. 14-2179
RICHARD SCHIFFMANN,
Plaintiff/Counterclaim Defendant, Appellant,
v.
UNITED STATES OF AMERICA,
Defendant/Counterclaim Plaintiff, Appellee,
v.
STEPHEN CUMMINGS,
Counterclaim Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
[Hon. Mary M. Lisi, U.S. District Judge]
Before
Lynch, Selya and Kayatta,
Circuit Judges.
David R. Sullivan, with whom Murtha Cullina LLP was on brief,
for appellants.
Douglas C. Rennie, Attorney, Tax Division, U.S. Department of
Justice, with whom Caroline D. Ciraolo, Acting Assistant Attorney
General, Joan I. Oppenheimer, Attorney, Tax Division, and Peter F.
Neronha, United States Attorney, were on brief, for appellee.
January 29, 2016
SELYA, Circuit Judge. The obligation of a corporate
employer to pay payroll taxes is familiar. The Internal Revenue
Code requires employers to withhold federal income taxes from
employees' wages and to hold such taxes in trust for the United
States. See 26 U.S.C. §§ 3102, 3402, 7501. As a result, such
taxes are often referred to as trust fund taxes. See id. § 7501.
If they are not paid to the government when and as required, the
Internal Revenue Service (IRS) may look past the corporate form
and hold officers of the corporation personally liable under
certain circumstances. See id. § 6672(a).
The court below, in sequential summary judgment rulings,
concluded that the appellants, Richard Schiffmann and Stephen
Cummings, were responsible persons who had wilfully caused ICOA,
Inc. (ICOA) to shirk its payroll tax obligations.1 The appellants
challenge this conclusion. After careful consideration, we
affirm.
I. BACKGROUND
The raw facts are largely undisputed. ICOA is a Rhode
Island corporation, whose subsidiaries provide wireless internet
services in public spaces (such as airports and marinas).2 As far
1 In its earliest filings, the government misspelled
Schiffmann's name (omitting the final "n"). For ease in reference,
we use the correct spelling throughout.
2
We use ICOA as a collective shorthand for ICOA and its
various subsidiaries. One of those subsidiaries, WebCenter
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back as 2002, ICOA began struggling to stay current on federal
trust fund tax obligations.
Schiffmann became ICOA's president in October of 2004
and retained that title after becoming its chief executive officer
(CEO) in April of 2005. Cummings (previously a consultant to the
company) became ICOA's chief financial officer (CFO) in October of
2005. At the latest, the appellants discovered the full extent of
ICOA's outstanding trust fund tax liabilities shortly after
Cummings became CFO. They nonetheless signed checks to pay other
creditors, but did not pay the government. The funds backing these
checks came primarily from cash infusions raised by Schiffmann and
ICOA's board chairman, George Strouthopoulos (Schiffmann's
predecessor as CEO). On November 18, 2005, the ICOA board of
directors (which then consisted of at least four members) met to
discuss, among other things, the outstanding trust fund tax
liabilities. By resolution, the board granted check-signing
authority to ICOA's officers on a schedule depending on debt amount
and officer rank. Schiffmann, as CEO, was given singular signing
authority for checks up to $100,000; Cummings, as CFO, was given
singular signing authority for checks up to $75,000. Matters went
downhill from there: the trust fund tax arrearage was not paid,
new trust fund taxes accumulated, the company's financial decline
Technology, Inc., serves as the paymaster for the ICOA family of
companies.
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continued, and the board fired Schiffmann and Cummings in June of
2006.
Failing to receive payment following notice and demand,
the IRS made trust fund recovery penalty assessments against, inter
alia, Schiffmann and Cummings.3 The IRS proceeded to seize what
funds it could find. For his part, Schiffmann filed an
unsuccessful refund and abatement request. He then repaired to
the federal district court and sought both to recover the sums
previously seized from him and to nullify the assessments. See 26
U.S.C. § 7422.
The government counterclaimed against Schiffmann,
Cummings, and others,4 seeking to recover the remainder of the
overdue taxes and penalties. In response, Cummings counterclaimed
3
In those penalty assessments, the IRS alleged that, as of
March 2014, Schiffmann owed close to $400,000 plus interest for
nearly five full quarters beginning April 1, 2005 and ending June
23, 2006. The IRS further alleged that, as of the same date,
Cummings owed more than $250,000 plus interest for nearly three
full quarters beginning October 1, 2005 and ending June 23, 2006.
4
For the sake of completeness, we note that two other
corporate officers, George Strouthopoulos and Erwin Vahlsing, were
named in the government's counterclaims. Since neither of them is
a party to this appeal, we do not further discuss the government's
counterclaims against them.
Additionally, we note that as to parties other than Schiffmann,
the government's counterclaims were technically cross-claims. See
6 Charles Alan Wright et al., Federal Practice and Procedure
§ 1432, 285 (3d ed. 2010). Nevertheless, the parties and the
district court called them counterclaims, and so will we.
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against the government, seeking to nullify the assessments against
him.
In due course, the government moved for summary judgment
on its counterclaims. The motion was accompanied by the required
statement of material facts not in dispute. See D.R.I. R.
56(a)(2). Schiffmann and Cummings opposed summary judgment, but
neither of them submitted a counterstatement of disputed facts.
See id. R. 56(a)(3). The district court entered summary judgment
for the government. See Schiffmann v. United States, No. 12-695,
2014 WL 1394199, at *11 (D.R.I. Apr. 9, 2014).
The government next moved for summary judgment on the
claims asserted by Schiffmann and Cummings, respectively. Once
again, its motion was accompanied by the requisite statement of
undisputed facts. See id. R. 56(a)(2). Schiffmann and Cummings
opposed the motion, this time submitting the required statement of
disputed facts. See D.R.I. R. 56(a)(3). The district court
granted the government's second summary judgment motion, see
Schiffmann v. United States, No. 12-695 (D.R.I. Oct. 3, 2014)
(unpublished order), and later entered a final judgment to include
sums certain (awarding the government $394,334.28 plus interest
against Schiffmann and $254,280.82 plus interest against
Cummings). This timely appeal ensued.
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II. ANALYSIS
In granting summary judgment, the district court
determined that, as a matter of law, Schiffmann and Cummings were
both responsible persons who had acted wilfully in not paying
ICOA's trust fund taxes. See 26 U.S.C. § 6672. We subdivide our
discussion of the appellants' assignments of error into three
segments.
A. The Legal Landscape.
As a general matter, liability under section 6672(a)
attaches when a "person required to collect, truthfully account
for, and pay over" trust fund taxes "willfully fails" to do so.
This stricture may apply to a corporate officer who is a
"responsible person." See Thomsen v. United States, 887 F.2d 12,
14 (1st Cir. 1989); Caterino v. United States, 794 F.2d 1, 3 (1st
Cir. 1986). For this purpose, "responsible person" is a term of
art: a person within a company who has a duty to collect, account
for, or pay over trust fund taxes. See 26 U.S.C. § 6671(b); Vinick
v. United States (Vinick II), 205 F.3d 1, 7 (1st Cir. 2000). For
any particular corporation, there may be more than one responsible
person. See Harrington v. United States, 504 F.2d 1306, 1312 (1st
Cir. 1974).
Such a determination entails consideration of a
corporate officer's status, duties, and authority. See Lubetzky
v. United States, 393 F.3d 76, 78-80 (1st Cir. 2004). The inquiry
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focuses on the "function of an individual in the employer's
business, not the level of the office held." Caterino, 794 F.2d
at 5. The criteria that typically inform the determination
(sometimes known in this circuit as the Vinick II factors) include
whether the person is an officer and/or director; whether the
person owns shares or otherwise has an equity interest in the
company; whether the person participates actively in day-to-day
management of the company; whether the person has authority to
hire and fire; whether the person "makes decisions regarding which,
when, and in what order outstanding debts or taxes will be paid";
whether the person exercises significant superintendence over bank
accounts and disbursement records; and whether the person is
endowed with check-signing authority. Vinick II, 205 F.3d at 7.
Though this list is not meant to be exhaustive and no one factor
is dispositive, see Jean v. United States, 396 F.3d 449, 454 (1st
Cir. 2005), debt prioritization, control over bank accounts, and
check-signing authority are at the "heart of the matter" because
they "identif[y] most readily the person who could have paid the
taxes, but chose not to do so." Vinick II, 205 F.3d at 9.
The bottom line, of course, is the extent of the
officer's decisionmaking authority. The ultimate question is
whether the officer "had the 'effective power' to pay the taxes —
that is, whether he had the actual authority or ability, in view
of his status within the corporation, to pay the taxes owed."
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Moulton v. United States, 429 F.3d 352, 356 (1st Cir. 2005)
(quoting Vinick II, 205 F.3d at 8) (emphasis in original); see
Stuart v. United States, 337 F.3d 31, 36 (1st Cir. 2003) (focusing
on "whether the person possessed sufficient control over corporate
affairs to avoid the default").
Responsibility is determined on a quarter-by-quarter
basis. See Vinick v. Comm'r of Internal Revenue (Vinick I), 110
F.3d 168, 172 (1st Cir. 1997). Thus, responsibility during one
quarter does not equate to responsibility in all quarters. See
Vinick II, 205 F.3d at 11.
A finding that an individual is a "responsible person"
is necessary, but not sufficient, to ground liability for unpaid
trust fund taxes. The government also must show that a responsible
person acted wilfully in failing to see to the payment of the
taxes. In this context, acting wilfully requires "knowledge that
taxes are due and withheld and conscious disregard of the
obligation to remit them." Stuart, 337 F.3d at 36 (quoting
Caterino, 794 F.2d at 6). Wilfullness may be manifested as a
"voluntary, conscious and intentional decision to prefer other
creditors to the United States." Harrington, 504 F.2d at 1311.
Neither a specific intent to cheat the government nor an evil
motive is required. See Caterino, 794 F.2d at 6. "[I]t is enough
if a defendant knows that the taxes are due from the company and
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yet disburses funds for other purposes or knowingly fails to pay
the required sum to the government." Lubetzky, 393 F.3d at 80.
B. The First Grant of Summary Judgment.
Against this backdrop, we turn to the district court's
granting of the government's first summary judgment motion. We
review the entry of summary judgment de novo. See Gomez v. Stop
& Shop Supermkts. Co., 670 F.3d 395, 396 (1st Cir. 2012). In
conducting this tamisage, we read the record in the light most
hospitable to the nonmoving parties (here, the appellants) and
draw all reasonable inferences in their favor. See id. Summary
judgment is appropriate where the record reflects no genuine issue
of material fact and the moving party is entitled to judgment as
a matter of law. See Fed. R. Civ. P. 56(a).
In this instance, our review is channeled by the posture
of the case. The local rules of the United States District Court
for the District of Rhode Island provide in pertinent part:
(a) Statement of Undisputed Facts.
(1) In addition to the memorandum of law
required by [Local Rule of Civil Procedure] 7,
a motion for summary judgment shall be
accompanied by a separate Statement of
Undisputed Facts that concisely sets forth all
facts that the movant contends are undisputed
and entitle the movant to judgment as a matter
of law.
(2) The Statement of Undisputed Facts shall be
filed as a separate document with the motion
and memorandum. Each "fact" shall be set forth
in a separate, numbered paragraph and shall
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identify the evidence establishing that fact,
including the page and line of any document to
which reference is made, unless opposing
counsel has expressly acknowledged that the
fact is undisputed.
(3) For purposes of a motion for summary
judgment, any fact alleged in the movant's
Statement of Undisputed Facts shall be deemed
admitted unless expressly denied or otherwise
controverted by a party objecting to the
motion. An objecting party that is contesting
the movant's Statement of Undisputed Facts
shall file a Statement of Disputed Facts, which
shall be numbered correspondingly to the
Statement of Undisputed Facts, and which shall
identify the evidence establishing the
dispute, in accordance with the requirements
of paragraph (a)(2).
D.R.I. R. 56(a)(1)-(3). In connection with the first summary
judgment motion, neither appellant filed a statement of disputed
facts as required by D.R.I. R. 56(a)(3).
This failure has consequences. "Valid local rules are
an important vehicle by which courts operate" and "carry the force
of law." Air Line Pilots Ass'n v. Precision Valley Aviation, Inc.,
26 F.3d 220, 224 (1st Cir. 1994). The appellants' failure meant
that all of the facts set forth in the government's statement of
undisputed facts were deemed admitted. See D.R.I. R. 56(a)(3);
see also Nieves-Romero v. United States, 715 F.3d 375, 377 (1st
Cir. 2013).
The facts contained in the statement of material facts
that accompanied the government's first summary judgment motion
plainly showed that each appellant was a responsible person, who
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acted wilfully in failing to pay trust fund taxes. As to
Schiffmann, the government sought to hold him responsible for
nearly five full quarters beginning April 1, 2005 and ending June
23, 2006 (when he was cashiered). Throughout this interval,
Schiffmann was ICOA's president and CEO. He also served as a
director and owned stock in the company. As such, he was deeply
involved in the day-to-day management of ICOA; his functions
included the power to hire and fire, the development of fundraising
strategies, and the formulation of a retention and compensation
plan for ICOA's workforce. Furthermore, he was a signatory on
ICOA's bank accounts, and regularly signed checks. Last but not
least, in November of 2005 the board adopted a resolution
specifically authorizing him to sign financial and contractual
obligations up to $100,000 without a second signature.
There is no question but that Schiffmann's status as CEO
and the wide range of his functions afforded him the kind of
significant suzerainty over ICOA's affairs to avoid defaulting on
taxes. See Stuart, 337 F.3d at 36; Godfrey v. United States, 748
F.2d 1568, 1575 (Fed. Cir. 1984). To cinch the matter,
Schiffmann's deep-seated involvement in the financial affairs of
the company, including his power over ICOA's bank accounts and
payroll, and his check-signing authority, gave him "'effective
power' to pay the taxes." Vinick II, 205 F.3d at 8 (quoting
Barnett v. IRS, 988 F.2d 1449, 1454 (5th Cir. 1993)). After all,
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he had funds at his disposal and the power to allocate them. He
was, therefore, a "responsible person" within the purview of
section 6672(a).
The undisputed facts likewise dictate a finding of
wilfulness on Schiffmann's part. Schiffmann acted wilfully
because — after becoming aware that the trust fund taxes were not
being paid — he did not lift a finger to pay them. Instead, he
allowed the company to use unencumbered funds to pay other
creditors. Given Schiffmann's position and authority, no more was
exigible to undergird a finding of wilfullness. See Jean, 396
F.3d at 454; Thomsen, 887 F.2d at 16-18.
To be sure, Schiffmann argues that he did not learn
specifically or in detail about ICOA's outstanding trust fund tax
liabilities until, at the earliest, October of 2005. But the fact
that he did not contemporaneously know of ICOA's failure to pay
trust fund taxes in earlier quarters does not matter: it is settled
law that when a responsible person realizes that trust fund taxes
have not been paid for prior quarters in which he was a responsible
person, he is under a duty to use all unencumbered funds available
to the company to satisfy those tax arrearages. See Erwin v.
United States, 591 F.3d 313, 326 (4th Cir. 2010); United States v.
Kim, 111 F.3d 1351, 1357 (7th Cir. 1997); Mazo v. United States,
591 F.2d 1151, 1157 (5th Cir. 1979). That rule applies in this
situation: Schiffmann was a responsible person during all the
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quarters at issue (after all, he was president and CEO of ICOA
from April of 2005 through June of 2006), and ICOA had unencumbered
funds at his disposal during the second and third quarters of 2005
and thereafter.
The government's statement of undisputed material facts
also supports the conclusion that Cummings was a responsible person
who wilfully avoided paying ICOA's trust fund taxes for the period
beginning October 1, 2005, and ending June 23, 2006 (when he, too,
was fired). As said, Cummings became CFO of ICOA on October 25,
2005. He served in that capacity for the rest of the period in
question; owned stock in ICOA; was a signatory on two of the
company's principal bank accounts; and enjoyed check-signing
authority up to $75,000.00 without a second signature. Tasked to
manage ICOA's financial health and develop appropriate fiscal
policies, he had access to all of the company's financial records,
including tax and payroll records. He decided which outstanding
bills to pay, and in what order. He was, therefore, a responsible
person who could have paid ICOA's taxes. See Jean, 396 F.3d at
454; Caterino, 794 F.2d at 6 ("Congress has chosen to impose
responsibility on one who has the ability to determine whom a
company will or will not pay.").
It cannot be gainsaid that Cummings acted wilfully. He
knew that the corporation had hefty trust fund tax liabilities
accumulated over a period of years. The expertise he had gained
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as an IRS field auditor makes manifest that he surely must have
understood the extent of his fiduciary obligation with respect to
these liabilities. Yet, following the meeting in which the board
gave him the power to sign checks and contractual obligations up
to $75,000, he exercised that power to pay rent and operational
expenses. The company's tax liabilities went begging. So viewed,
Cummings voluntarily, consciously, and intentionally preferred
other creditors to the United States. See Harrington, 504 F.2d at
1311.
We summarize succinctly. On the record as it stood at
the time of the first summary judgment ruling, there was no genuine
issue as to any material fact. Both Schiffmann and Cummings were
responsible persons during the relevant quarters. Each of them
acted wilfully in failing to pay ICOA's overdue and current trust
fund taxes with unencumbered funds and in prioritizing other
creditors over the government. Consequently, the district court
did not err in granting the government's first motion for summary
judgment.
C. The Second Grant of Summary Judgment.
The government's second summary judgment motion, like
the first, was accompanied by a separate statement of material
facts not in dispute. See D.R.I. R. 56(a)(2). This time, however,
the appellants' opposition included a counterstatement of disputed
material facts. See id. R. 56(a)(3). Both of these statements
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must be taken into account in analyzing the second summary judgment
ruling. Even so, most of the salient facts adduced by the
government in connection with the first summary judgment motion
remain uncontradicted.
To begin, the appellants' counterstatement does little
to undermine the facts, recounted above, showing that Schiffmann
and Cummings were responsible persons who wilfully failed to see
to the payment of trust fund taxes. The counterstatement does,
however, contain some further facts that the appellants suggest
should alter the decisional calculus. We briefly explore the
appellants' four additional arguments.
First, the appellants claim that ICOA's funds were
largely encumbered and, thus, unavailable for tax payments. But
this claim lacks any meaningful support in the record. In this
context, funds are deemed encumbered only if the taxpayer is
legally obligated to use them for some purpose other than the
satisfaction of a preexisting or current trust fund tax liability
and that obligation is superior to the IRS's interest in the funds.
See Nakano v. United States, 742 F.3d 1208, 1212 (9th Cir.), cert.
denied, 134 S. Ct. 2680 (2014). The burden is on the responsible
person to identify disputed facts sufficient to raise a genuine
issue about whether funds used to pay other creditors were
encumbered. See Conway v. United States, 647 F.3d 228, 237 (5th
Cir. 2011).
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Here, the record contains no facts sufficient to show
the existence of such a legal obligation: ICOA received capital
infusions of more than $500,000 while Cummings was its CFO and
received capital infusions of more than $900,000 while Schiffmann
was CEO. It also received a steady stream of revenue from its
business operations. The appellants have not adduced any
significantly probative evidence sufficient to support a finding
that all or any substantial part of these funds were encumbered by
obligations superior to the obligation owed to the IRS. Contrary
to the appellants' importunings, funds are not encumbered simply
because corporate officers elect to earmark them informally for
specific purposes (such as payroll or trade debts). See Bradshaw
v. United States, 83 F.3d 1175, 1180 (10th Cir. 1995); Kalb v.
United States, 505 F.2d 506, 510 (2d Cir. 1974).
Second, the appellants attempt to draw a distinction
between technical power (that is, the board resolution authorizing
them to make disbursements) and actual power (that is, what
actually happened in the workplace). We rejected this very
argument in Moulton, in which we explained that technical power
versus actual power constitutes a false dichotomy. See 429 F.3d
at 355-56 (collecting cases). The correct legal standard extends
liability to anybody "with responsibility and authority to avoid
the default which constitutes a violation of the statute."
Harrington, 504 F.2d at 1312. Here, the record shows beyond hope
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of contradiction that each appellant had both the responsibility
and the authority to pay ICOA's trust fund taxes.
The appellants' third plaint is that the board of
directors limited their check-signing authority by directing that
it not be used to pay taxes. The record, however, belies this
claim. There is no such limitation on the face of the resolution
adopted by the board of directors. Though two of the directors
may have voiced the sentiment during the November 2005 board
meeting that any payment of taxes should be further deferred, a
majority of the directors expressed no such views. At any rate,
voicing a sentiment is not the same as adopting a resolution by a
majority vote. Cf. R.I. Gen. Laws, §§ 7-1.2-801(a), 806
(stipulating that a majority of a corporation's board of directors
is required to confer authority to act upon a corporate officer).
Fourth, and finally, the appellants argue that they were
subordinate to the wishes of the board of directors, so neither of
them had the final word about which creditors got paid and which
did not. But the fact that someone in the corporate hierarchy may
outrank a corporate officer does not shield that officer from
section 6672 liability. In that context, liability depends on
significant, not exclusive, control over the disbursement of
funds. See Hochstein v. United States, 900 F.2d 543, 547 (2d Cir.
1990); Caterino, 794 F.2d at 5-6; Neckles v. United States, 579
F.2d 938, 940 (5th Cir. 1978). What counts in this case is that,
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given the totality of the circumstances, the only reasonable view
of the evidence is that each appellant possessed and exerted
significant control over ICOA's corporate finances and could have
paid the IRS more money had he been of a mind to do so.
Again, we summarize succinctly. On the full record,
there is no genuine issue as to any material fact. Both Schiffmann
and Cummings were responsible persons during the relevant
quarters, and each of them acted wilfully in failing to see to the
payment of ICOA's overdue and current trust fund taxes.
Consequently, the court below did not err in granting the
government's second motion for summary judgment.
III. CONCLUSION
We need go no further. For the reasons elucidated above,
the judgment of the district court is
Affirmed.
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