Robert Newbill v. United States

UNPUBLISHED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Affirmed in part, vacated in part, and remanded by unpublished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Unpublished opinions are not binding precedent in this circuit.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
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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
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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).
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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)
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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).
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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
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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.
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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
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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
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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.
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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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