United States v. Carrigan

Opinions of the United
1994 Decisions States Court of Appeals
for the Third Circuit
7-15-1994
United States of America v. Carrigan, et al.
Precedential or Non-Precedential:
Docket 93-5687
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Recommended Citation
"United States of America v. Carrigan, et al." (1994). 1994 Decisions. Paper 83.
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UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
___________________________________
No. 93-5687
___________________________________
UNITED STATES OF AMERICA
v.
ROBERT P. CARRIGAN, DAVID L. FENDRICK
AND EDWARD M. SULLIVAN
EDWARD M. SULLIVAN, Appellant
___________________________________
On Appeal From the United States District Court
For the District of New Jersey
(D.C. Civil No. 92-cv-4443
___________________________________
Argued May 5, 1994
Before: SLOVITER, Chief Judge,
HUTCHINSON, Circuit Judge, and
DIAMOND, District Judge*
(Filed July 18, 1994)
___________________________________
*Hon. Gustave Diamond, United States District Judge for the
Western District of Pennsylvania, sitting by designation.
1
Gary R. Allen, Esquire
Jonathan S. Cohen, Esquire
Marion E.M. Erickson, Esquire (Argued)
United States Department of Justice
Tax Division
P.O. Box 502
Washington, D.C. 20044
(Attorneys for Appellee)
Robert H. Louis, Esquire
Howard M. Soloman, Esquire (Argued)
Abrahams, Loewenstein, Bushman & Kauffman
1650 Market Street
3100 One Liberty Place
Philadelphia, PA 19103
(Attorneys for Appellant)
______________
OPINION OF THE COURT
_______________
DIAMOND, District Judge
Edward M. Sullivan ("Sullivan") appeals an order of the
United States District Court for the District of New Jersey
granting summary judgment in favor of the United States and
denying his motion for summary judgment. Specifically, the
district court upheld the Internal Revenue Service's ("IRS")
assessment of a 100% penalty against Sullivan pursuant to §6672
of the Internal Revenue Code on grounds that he was a responsible
person who willfully failed to pay over federal employment taxes.
Because we believe that the record before us does not establish
Sullivan's liability as a matter of law, we will reverse and
remand for a trial on the merits.
2
I. Background Facts0
In September 1984, Sullivan began working as president
of Pat's International, Ltd. ("Pat's"), a company which operated
fast food restaurants specializing in Philadelphia-style
cheesesteaks. Sullivan was hired by Robert P. Carrigan
("Carrigan"), chairman of the board of directors and chief
executive officer of Pat's. Pursuant to his designation as
president, Sullivan was responsible for (1) assisting Carrigan in
raising capital for Pat's by meeting with potential investors;
(2) managing restaurant operations; and (3) locating new
restaurant sites. Sullivan also was authorized to sign checks
drawn from the company's payroll and general operating accounts.
In February or March 1985, Sullivan first became aware
that Pat's was not current in its payment of quarterly employment
taxes to the United States.0 During this same time period,
Sullivan loaned Pat's $20,000.00, at the request of Carrigan, so
that it could pay its creditors, including the IRS. Sullivan
took no steps, however, to ensure that the $20,000.00 was applied
to the tax liability, even though he knew that other creditors
were being paid ahead of the United States. Sullivan was removed
0
These facts are drawn exclusively from the parties' joint
pretrial admissions and stipulations submitted to the district
court.
0
The record also demonstrates that during his tenure as president
of Pat's, Sullivan was aware that an employer has a duty to
withhold and pay over to the United States the federal employment
taxes of its employees. Sullivan also was aware that those
individuals responsible for the collection and payment of
employment taxes, who failed to do so, could be held personally
liable for the amount of the employment taxes not paid to the
United States.
3
as president of Pat's in August 1985, and left the company the
following month.
In April 1989, the IRS made an assessment against
Sullivan in the amount of $83,060.78 pursuant to 26 U.S.C.A.
§6672.0 The IRS charged that Sullivan willfully failed to
account for and pay over to the United States federal employment
taxes withheld from the wages of Pat's employees during the three
quarters ending March 31, 1985, June 30, 1985, and September 30,
1985.0
In October 1992, the United States filed a complaint in
the district court seeking to reduce to judgment the assessments
that had been made against Sullivan, Carrigan, and Fendrick
0
This section provides in pertinent part:
§6672. Failure to Collect and Pay Over Tax,
Attempt to Evade or Defeat Tax.
(a) General Rule. 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.
26 U.S.C.A. §6672.
0
At the same time, the IRS made assessments in the amount of
$204,820.33 against Carrigan and $102,661.00 against David
Fendrick ("Fendrick"), chief financial officer of Pat's, for the
four quarters ending March 30, 1985, through December 31, 1985.
4
pursuant to §6672.0 Thereafter, Sullivan filed an answer seeking
dismissal of the complaint against him for failure to state a
claim upon which relief could be granted, and also filed a
counterclaim seeking a refund of $100.00 paid on account of the
penalty assessed against him.0 Upon consideration of cross-
motions for summary judgment, the district court found that
"[a]lthough Sullivan may not have always had the 'final' say
about paying creditors, in the apocalyptic sense of the word," he
was a responsible person under §6672 because (1) he had signature
authority on the payroll and general operating accounts, which he
exercised at least once in making a tax payment to the IRS; (2)
he was president of Pat's; (3) he devoted significant time to
raising capital for the company; and (4) he loaned the company
$20,000.00 to pay creditors. Further, the district court found
that Sullivan willfully failed to pay over the withholding taxes
because he was aware of the unpaid tax liability and that other
creditors were being paid ahead of the IRS, yet failed to
exercise his authority to ensure that the taxes were paid, either
with the $20,000.00 that he personally loaned to Pat's or from
the existing balances in the company's accounts on which he had
signature authority.0
0
Carrigan and Fendrick failed to plead or otherwise defend, and
defaults were entered against them in this action on May 14,
1993. They are not parties to this appeal.
0
In February 1992, Sullivan paid $100.00 of the assessment made
against him, and simultaneously filed a claim for refund and a
request for abatement of the entire assessment. The refund claim
was denied by the IRS on May 8, 1992.
0
During the period that Sullivan was president and knew that the
employment taxes were not being paid, there was a positive
balance in the payroll account of no more than $9,856.61 and a
5
The district court had jurisdiction over the parties'
claims by virtue of 28 U.S.C.A. §§1340, 1345, and 1355 and 26
U.S.C.A. §§7401 and 7402. We have jurisdiction over the appeal
pursuant to 28 U.S.C.A. §1291.
In reviewing the district court's grant of summary
judgment we exercise plenary review and employ the same standard
applicable in the district court. Davis v. Portline Transportes
Maritime, 16 F.3d 532, 536 (3d Cir. 1994). We must consider all
of the facts and inferences in the light most favorable to the
nonmoving party. The moving party can prevail in its motion for
summary judgment only if there is no genuine issue of material
fact and the moving party is entitled to judgment as a matter of
law. Peters v. Delaware River Port Authority, 16 F.3d 1346, 1349
(3d Cir. 1994).
II. Discussion
The question of Sullivan's liability under §6672
presents two issues: whether Sullivan is a responsible person
and whether he willfully failed to collect, truthfully account
for or pay over federal employment taxes. As we have extensively
discussed the standards for addressing these two issues before,
we will only summarize their salient points. We will first
address the responsible person issue.
A.
positive balance in the general operating account of no more than
$132,770.43.
6
A person responsible under §6672 is a person required
to collect, truthfully account for or pay over any tax due to the
United States. Brounstein v. United States, 979 F.2d 952, 954
(3d Cir. 1992). "Responsibility is a matter of status, duty, or
authority, not knowledge." Quattrone Accountants, Inc. v. IRS,
895 F.2d 921, 927 (3d Cir. 1990). A responsible person need not
have exclusive control over the company's finances, he need only
have significant control. United States v. Vespe, 868 F.2d 1328,
1332 (3d Cir. 1989). "A person has significant control if he has
the final or significant word over which bills or creditors get
paid." Quattrone, 895 F.2d at 927. In determining whether an
individual is a responsible person, courts also consider other
factors. These include: (1) the duties of the officer as
outlined by the corporate by-laws; (2) the ability of the
individual to sign checks of the corporation; (3) the taxpayer's
signature on the employer's federal employment or other tax
returns; (4) the identity of the officers, directors and
shareholders of the corporation; (5) the identity of the
individuals who hired and fired employees; and (6) the identity
of the individual(s) who were in charge of the financial affairs
of the corporation. Brounstein, 979 F.2d at 954-55.
Applying the foregoing principles to the present case,
we find that there is a genuine issue of material fact concerning
whether Sullivan had "significant control" over Pat's financial
affairs. Although the undisputed evidence in this record
establishes that Sullivan functioned as the president of Pat's,
exercised his signature authority on one occasion to sign a
7
corporate check which was applied to Pat's tax liabilities, and
devoted a significant amount of his time to raising capital for
the company, the undisputed evidence also indicates that
Sullivan's control over Pat's financial affairs was significantly
circumscribed by Carrigan and Fendrick. As the district court
stated in its opinion:
It is undisputed that Sullivan did not have
exclusive control over the management of
Pat's. Both parties agree that defendants
Carrigan and Fendrick were responsible
persons who willfully failed to collect and
pay Pat's withholding taxes. Defendant
Carrigan was responsible for handling
financial affairs. Defendant David Fendrick,
Chief Financial Officer, maintained all of
Pat's books, records, and bank accounts.
Defendants Carrigan and Fendrick handled all
creditors' inquiries and bills. Defendant
Fendrick prepared and filed all federal
income and employment tax returns. Defendant
Fendrick also directed all negotiations with
the IRS regarding the unpaid tax liabilities.
Sullivan did not participate in any meetings
with the IRS.
Additionally, Sullivan did not own stock in
Pat's, he never signed Pat's tax returns, he
never negotiated with creditors on behalf of
Pat's, and he had no independent authority to
hire or fire employees without the consent of
defendant Carrigan.
Sullivan was authorized to sign checks on
behalf of Pat's with respect to the payroll
account and the general operating account.
However, the corporate books, records and
checkbooks were locked in an office, and
Sullivan did not have his own key. He signed
only one check on behalf of the company. In
July 1985, Sullivan signed a corporate check
in the amount of $9,451.61 which was applied
to Pat's outstanding tax liabilities for the
third quarter of 1985.
8
In light of the foregoing facts that Sullivan was not
responsible for handling the financial affairs of the company,
did not prepare, maintain, or have access to any of the corporate
books, records or checkbooks, did not prepare or sign any
corporate tax returns, and did not handle any creditors' bills or
inquiries nor negotiate with any creditor on behalf of Pat's, it
cannot be said as a matter of law that he had significant control
of the company's financial affairs. Based on all the evidence of
record, we hold that a reasonable jury could find that Sullivan
was not a responsible person. Anderson v. Liberty Lobby, Inc.,
477 U.S. 242 (1986). We conclude, therefore, that the district
court erred in granting summary judgment in favor of the United
States on this issue.
B.
We next consider whether Sullivan willfully failed to
truthfully account for and pay over the taxes due. The term
willfulness has been interpreted broadly to encompass a range of
actions by responsible persons. Generally, willfulness is a
"voluntary, conscious and intentional decision to prefer other
creditors over the Government." Quattrone, 895 F.2d at 928. In
this regard, "a responsible person acts willfully if he pays
other creditors in preference to the IRS knowing that taxes are
due." Id. A responsible person also acts willfully if he
demonstrates a reckless disregard for whether taxes have been
paid. Vespe, 868 F.2d at 1335. The "reckless disregard"
standard is met if the taxpayer "'(1) clearly ought to have known
9
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 for
certain very easily.'" Id. (quoting Wright v. United States, 809
F.2d 425, 427 (7th Cir. 1987)).
Applying these principles to the instant case, we find
that there is a genuine issue of material fact concerning whether
Sullivan willfully failed to pay over the taxes due. Although
the record establishes that Sullivan lent the company $20,000.00
to pay its creditors, including the IRS, but took no other steps
to direct that the tax liability be paid, the record also
establishes that the one check that Sullivan did sign as
president of Pat's, a check for $9,451.61, was paid to the IRS.
Additionally, the record before us is not clear
concerning whether the check to the IRS came from the funds lent
by Sullivan or from some other source. The record is equally
unclear about how much tax was due when Sullivan signed the check
to the IRS. Likewise, the record does not indicate what
knowledge Sullivan had concerning Pat's tax liability when he
made the $20,000.00 loan. Given his admittedly limited access to
the company's tax and other financial records, Sullivan may not
have acted with reckless disregard of whether the taxes were
being paid when he took no steps to direct that the $20,000.00 be
applied exclusively to Pat's tax liability. In light of all the
evidence, we believe that a reasonable jury could find that
Sullivan did not willfully fail to pay over the taxes due. We
conclude, therefore, that the district court erred in granting
summary judgment in favor of the United States on this issue.
10
III. Conclusion
For the foregoing reasons, the judgment of the district
court granting summary judgment for the United States will be
reversed and the case will be remanded for further proceedings
consistent with this opinion.0
_________________________________________________________________
0
Sullivan also has appealed the denial of his motion for summary
judgment. Because we have determined that there is a genuine
issue of material fact regarding Sullivan's liability under
§6672, we hold that the district court did not err in denying his
motion for summary judgment.
11