DocketNumber： No. 09-837T
Judges： Damich
Filed Date： 2/28/2012
Status： Precedential
Modified Date： 11/7/2024
OPINION & ORDER
This is a tax refund case concerning penalties that the Internal Revenue Service (“IRS”) assessed on and collected from Plaintiff Louis Robus, Jr. The main issue in this ease is whether it was proper for the IRS to assess Robus with tax penalties for his role in allowing his corporation, Village Turf, Inc., to fail to pay over to the government the taxes it had withheld from its employees’ paychecks (“withholding taxes”). Robus claims he is entitled to a refund of all amounts the IRS has collected from him. The Government counterclaims to collect the unpaid balance of the penalties, plus interest and fees. The amounts at issue total approximately $315,000.
The IRS assessed the penalties under 26 U.S.C. § 6672, which permits the IRS to assess a personal penalty, equal to the amount of the taxes not paid by the employer, on any person who is responsible for ensuring that the employer collects and remits withholding taxes and who “willfully”
To resolve the disputed factual issues relating to willfulness, the Court held a two-day trial on October 26 and 27, 2011, with closing arguments held on December 1, 2011.
After careful consideration, the Court finds that Kobus is liable for the penalties. The Court finds that, during most of the periods at issue, Kobus knew that Village Turf was not remitting its withholding taxes and he chose not to pay over the funds to the IRS. For the remainder of the periods, the Court finds that, after Kobus learned that Village Turf had not paid over withholding taxes in past tax periods, Kobus chose not to pay the past deficiencies, despite having funds to do so. Therefore, Kobus willfully failed to pay over the withholding taxes and he is liable for the tax penalties for all periods at issue.
I. Background
A. Withholding Taxes and The Penalties Assessed on Kobus
The Internal Revenue Code imposes on every employer the obligation to collect from its employees both federal income taxes and Federal Insurance Contributions Act (“FICA”) taxes. 26 U.S.C. §§ 3101, 3102, 3111, 3402 (2006). Employers collect the taxes by withholding funds from employee wages. §§ 3101, 3111. Employers do not immediately remit the withheld taxes to the government; instead, they hold the funds “in trust” until they remit the funds by making a federal tax deposit at an authorized financial institution. Id. at § 7501. The taxes withheld from wages commonly are referred to as withholding taxes or trust-fund taxes. When the employer makes a withholding-tax deposit, the employer also must remit a matching FICA tax payment for each employee.
Employers typically remit withholding-tax deposits on a semiweekly or monthly basis.
Withheld taxes are credited to the employee regardless of whether the employer pays them to the Government. Because the employer is not required to pay over the funds upon their collection, the withheld amounts can “be a tempting source of ready cash to a failing corporation.... ” Slodov v. United States, 436 U.S. 238, 243, 98 S.Ct. 1778, 56 L.Ed.2d 251 (1978). To prevent misuse of the funds, the IRS not only will hold the employer liable for any unpaid withholding taxes, but it also can assess a personal penalty, equal to the amount of the unpaid taxes, on any person who is responsible for the employer’s failure to pay the taxes. Id. at 244-45, 98 S.Ct. 1778; Godfrey v. United States, 748 F.2d 1568, 1574-75 (Fed.Cir.1984); § 6672.
The IRS assessed the penalties for 12 distinct tax periods: 1996, 1997, 1998, 1999, 2000, 2001, the second quarter (“Q_”) of 2002, Q3 2002, Q1 2003, Q2 2003, Q3 2003, and Q4 2003. Through levies and garnishments, the IRS has collected money in satisfaction of the penalties for 1996 to 2000 and for some of 2001. Plaintiff requests a refund of all payments that the IRS has collected from him. Kobus has a remaining unpaid penalty balance for part of 2001 and for all of Q2 2002, Q3 2002, Q1 2003, Q2 2003, Q3 2003, and Q4 2003. The Government counterclaims to collect the outstanding balance of the unpaid penalties. Kobus filed an administrative appeal with the IRS on July 7, 2004, but the IRS Appeals Division denied the appeal on November 4, 2005. Joint Exhibit (“Ex.”) 71; Ex. 66 at 14; see Tr. at 365. Kobus then filed this ease on December 7, 2009.
The primary factual issue is whether Ko-bus willfully failed to pay over the withholding taxes. However, this ease also presents several ancillary issues that the Court must resolve. As a preliminary matter, the Court must determine the proper allocation of the burden of proof because the parties dispute who bears the burden of proving that Kobus acted willfully. Complicating this issue is the Government’s contention that Kobus should be liable for the spoliation of the evidence because many of Village Turfs business records were lost or destroyed after the IRS began investigating Village Turf. Next, Ko-bus argues that, if the Court determines he acted willfully, his 2003 liability should be reduced because the IRS’s penalty assessments were based on incorrect estimates of Village Turfs annual wages. Finally, Kobus argues that the Government improperly preferred itself to Kobus’s other creditors when it purchased and resold Kobus’s house after a senior creditor foreclosed on it.
B. Factual Background 1. Plaintiffs Operation of Village Turf
Kobus is an agricultural engineer, who served in the U.S. Marine Corps, for 23 years. Jt. Stip. Facts (“Stip.”) ¶¶ 5, 7. During his service in the Marine Corps, Kobus held several positions, including “Director of Facilities Management,” where he was responsible for a $17 million budget, and “Head of Budget and Programming,” where he prepared 5-year budgets. Tr. 97-99; see Stip. ¶ 6. In both positions, he was responsible for managing a large number of personnel. Stip. ¶ 6. After he retired, he formed Village Turf, Inc., in 1993, which initially was a landscaping and lawn maintenance business.
Village Turf was a Virginia corporation, and it operated out of various locations in Fairfax County, Virginia. Stip. ¶¶ 8, 10. Kobus employed landscaping crews to do most of the physical labor, and he oversaw the crews and handled quality control. Tr. at 24-28. Though he performed some field work, Kobus spent most of his time promoting Village Turf and trying to find new business and clients. Tr. at 24-28. Kobus also employed an office staff which handled most of the day-to-day tasks of running the business. Throughout much of Village Turfs existence, Kobus was its only corporate officer. From May 2000 to March 2002, however, Susan Clay officially was listed as Village Turfs corporate secretary. Exs. 60,62.
Sometime around 2000, Kobus was offered the opportunity to purchase a retail store and a dealership agreement with Southern States Cooperative, Inc., a company that distributes agricultural products. In 2001, Kobus purchased the store, and Village Turf entered into a dealership agreement with Southern States. Before entering into the agreement, Village Turf provided Southern States with
As Kobus was busy working on the landscaping business, he decided that he would be unable to dedicate his time to starting up and running the retail store, which was located 40 miles away in Fredericksburg, Virginia. Tr. at 36-37. Consequently, Kobus hired Daniel Lagasse to set up and manage the retail store.
In 2001, Fairfax County charged Village Turf with a zoning violation over the company’s use of the property where its landscaping office was located. The County asserted that Village Turfs construction of a storage shed and the overall character of its use of the property were not consistent with the property’s zoning classification. Stip. ¶¶ 179, 302. The County imposed over $100,000 of fines on Village Turf, Kobus, and Clay, the owner of the property. Stip. ¶ 180; Ex. 144. It also issued a final decree ordering Village Turf and Kobus to cease using the property as a contractor’s office and shop with outdoor storage of construction equipment. Stip. ¶ 181; Ex. 142.
In 2003, Kobus attempted to set up a new corporate entity to operate the retail store. Tr. at 69-70. In November 2003, Kobus formed VTSS, Inc., Ex. 64, and he acquired a new employer identification number for the store from the IRS, Stip. ¶¶ 107-12. The record shows that Kobus did not fully transfer control of the retail operations to VTSS during 2003, which is the last period at issue in this case.
By 2004, Village Turf eliminated the landscaping side of its business because the County’s zoning rulings had prevented Kobus from operating it. Then, in the first quarter of 2004, Lagasse resigned and left the retail store. Stip. ¶ 149.
Kobus continued to operate the retail store for another year, although it was difficult to keep the business afloat. See Tr. at 62, 82 (store closed around February 2005). In 2005, Southern States cut off Village Turf’s credit line. See Ex. 165 at 2; Tr. at 62. In 2005, Village Turf was unable to pay rent on the retail store and the landlord evicted Village Turf from the store location. In 2006, Virginia terminated Village Turfs corporate existence. Stip. ¶ 8. After Village Turf was evicted and the store closed, Southern States was unable to collect the outstanding balance on Village Turfs inventory account. In 2008, Southern States foreclosed on its lien on Kobus’s home.
2. The Role of Village Turfs Office Staff in Tax Matters
As Village Turfs owner, Kobus handled mostly higher level duties, such as quality control and finding new business, and he delegated to his office personnel most of the day-to-day tasks of running the business. The delegated tasks included the preparation of Village Turfs payroll and the collection and remitting of withholding taxes. Over the course of the tax periods at issue, 3 different office employees had the duty of preparing Village Turfs payroll. Each of the 3 employees had different responsibilities at Village Turf, and each employee’s payroll prepara
Around March of 1997, Woods retired, and around that time, Kobus began working with Susan Clay. Stip. ¶¶ 31-32. Although Clay was not a Village Turf employee, she was responsible for entering accounting data into the payroll system and for preparing the payroll.
As noted earlier, in 2001, Lagasse began working for Village Turf, and Lagasse managed many aspects of the retail store. It is undisputed that Kobus gave Lagasse authority to manage the store, handle its payroll,
3. Village Turfs Tax Problems
The parties dispute when Kobus first knew that Village Turf was not paying its withholding taxes. They agree, however, that by early 2002, “escalating federal and state tax-collection activities” lead Kobus to request Lagasse’s assistance. Stip. ¶ 124.
When Schibani first contacted Shrewsbury on October 29, 2003, Shrewsbury told him to have Kobus provide her with 3 months of business records and a Form 433(b), which is the first form a taxpayer must file to start negotiating a resolution to a tax dispute. Tr. at 353-54; Ex. 66 at 8. These records were not provided. Ex. 66 at 12. On January 5, 2004, Shrewsbury again asked for the Form 433(b), and warned Schibani that the IRS would pursue further enforcement action if the form was not received. Ex. 66 at 10. On January 20, 2004, Schibani told Shrewsbury that Village Turf was working on putting together the information and he should have it in about a week, but he never submitted the information. Ex. 66 at 11-12. Shrews-bury requested to visit the store to meet with Kobus, to see how business was going and to see the records, but her request was not granted. Tr. at 356; Ex. 66 at 11.
By this time, Village Turf was experiencing major financial difficulties. The zoning dispute referred to previously resulted in several substantial fines and caused Village Turf to eliminate its landscaping operations. Stip. ¶ 180; see Ex. 144. Village Turf also was experiencing major financial problems, and Lagasse resigned in the first quarter of 2004.
Meanwhile, the IRS had been continuing its investigation of Village Turf. Between Mareh and May 2004, the IRS sent Kobus several letters. Tr. at 357-58; Ex. 66 at 14-15. On March 9, 2004, Shrewsbury visited the retail store, and her notes document that the store was busy and in full operation. Based on her observations, Shrewsbury concluded that Village Turf had funds to pay the deficient taxes but was choosing not to pay them, and she recommended assessing a penalty on Kobus. On March 10, 2004, the IRS mailed Kobus a notice proposing to assess a penalty on him personally. Tr. at 357. On May 12, 2004, Shrewsbury had the IRS mail Kobus an appointment letter proposing to visit him at his home on May 25, 2004. Tr. at 358. On May 13, 2004, the IRS mailed Kobus a letter notifying him that he was being assessed with a penalty under § 6672 and notifying him of his due process rights. Tr. at 359; Stip. ¶ 291; Ex. 66 at 17.
Having received no response, Shrewsbury went to visit Kobus on May 27, 2004. She found Kobus at home and spoke with him, but Kobus declined a formal interview. Ex. 66 at 19-20; see Tr. at 360. During the conversation, Kobus confirmed that Village Turf had a bank account with Burke & Herbert Bank & Trust Company. He explained that the account had been closed because the landscaping operation went out of business and he had liquidated all of its assets. Ex. 66 at 19-20.
On July 7, 2004, Kobus appealed the penalties for 1996 to 2002. Ex. 66 at 24. On November 4, 2005, the IRS notified Kobus that his appeal was denied and it was assessing him with tax penalties under § 6672. Tr. at 365; Stip. ¶ 292. On October 24, 2006, the
4. The Loss of Village Turfs Financial Records
The parties agree that at the time this suit was filed, most of Village Turfs accounting, bank, and payroll records had been destroyed. Stip. ¶ 311. It is undisputed that Village Turf kept its landscaping records on a computer at the main office, with paper copies of any records stored in the basement and in a rented storage unit. Village Turf kept the records for its retail store on a computer at the store and it maintained paper records on the premises as well. Kobus asserts that, due to several events outside of his control, most of Village Turfs records were lost or destroyed between 2004 and 2007. The Court notes that Shrewsbury began investigating Village Turf in July 2003.
The records from the landscaping business were lost over several years. Kobus testified that when Village Turf moved to a new office location around 2000, some of Village Turfs paper records were lost in the move. Tr. at 136-38. At the new location, Village Turf stored most of its paper records in the basement, Tr. at 136-38, but it also stored some of its files off premises in public storage unit, Stip. ¶ 302. Kobus testified that in 2004 a flood destroyed all of the paper financial records that were stored in the basement. Tr. at 135-37. In 2006 or 2007, the paper records that were kept in the storage unit also were destroyed, after Village Turf failed to pay rent on the unit. Stip. ¶ 302. Finally, any digital records that existed were destroyed in 2006 or 2007, when Kobus purchased a new computer and discarded the old one from the landscaping office. Stip. ¶ 306.
As for the retail store’s records, Kobus asserts that many of those records went missing in early 2004, around the time that Lagasse resigned. The Government disputes this because Lagasse testified that all paper and digital records existed when he resigned. In any event, even if the records still existed in 2004, any records in existence were destroyed in 2005, after Village Turf failed to pay rent on the retail store and was evicted. Tr. at 138-39. The landlord changed the locks and did not permit Village Turf to remove anything from the store. Consequently, Kobus could not recover the store’s computer or the paper records. Stip. ¶ 310.
While most of Village Turfs records have been destroyed, the parties were able to recover a few records from third parties. The evidence in this case includes bank records supplied by Village Turf s banks, the tax returns that Village Turf filed, and several financial statements from 2000, which Village Turf had provided to Southern States.
II. Discussion
The primary issue in this case is whether Kobus acted willfully. But, as indicated earlier, there are other ancillary issues involved in this case, namely, (1) burden of proof, (2) the accuracy of the 2003 estimate, and (3) the impact of the IRS’s sale of Kobus’s house. Deciding which party bears the burden of proof is analytically prior to the primary issue of willfulness. Therefore, the Court will first address this issue, then willfulness, and finally issues (2) and (3).
A. Burden of Proof
The general rule in tax cases is that assessments made by the IRS are presumed to be correct, and therefore, the taxpayer bears the burden of proof. Danville Plywood Corp. v. United States, 899 F.2d 3, 7-8 (Fed.Cir.1990). However, if a tax assessment is found to be “naked,” lacking in “[a]ny foundation whatsoever,” the presumption of correctness does not apply and the Government will bear the burden of proof. United States v. Janis, 428 U.S. 433, 441, 96 S.Ct. 3021, 49 L.Ed.2d 1046 (1976).
Kobus argues that the Government bears the burden of proving he is liable for all the penalties, which will require the Government to prove that Kobus acted willfully. According to Kobus, at the time the IRS assessed him with the penalties, the IRS could not have had sufficient information to determine whether he had acted willfully. Tr. at 16-17. Because the IRS made the assessments without having adequate eviden-tiary support, Kobus argues that the assessments were naked or arbitrary, and therefore, the Government bears the burden of
The Government argues that, because IRS decisions are presumed to be valid, Plaintiff bears the burden of proving that he is not liable by proving that he did not act willfully. The Government asserts that the assessments are not naked because the IRS’s decision to impose a penalty is amply supported by the evidence in the record. The Government argues that the IRS’s determination of willfulness cannot be considered arbitrary or naked because not only did Shrewsbury thoroughly investigate Village Turf and Kobus, but the IRS Appeals Division independently examined the evidence and Kobus’s actions as well. The Government argues that Kobus bears the burden of proof for all of the tax periods at issue because the presumption of correctness applies to the IRS’s assessments, irrespective of whether it is a claim of counterclaim.
Ordinarily, when a defendant makes a counterclaim, it bears the burden of proof for that claim. Tax cases, however are different because assessments made by the IRS generally are presumed to be correct. Danville Plywood, 899 F.2d at 7-8 (stating that the taxpayer carries the burden of production and the ultimate burden of proof); United States v. Schroeder, 900 F.2d 1144, 1148 (7th Cir.1990) (same); Ferguson v. United States, 484 F.3d 1068, 1077 (8th Cir.2007) (stating that “[assessments under § 6672 are ordinarily presumed to be correct”). The Government can invoke the presumption of correctness by presenting the Certificate of Assessment, which is prima facie proof that the IRS made a valid assessment. Rocovich v. United States, 933 F.2d 991, 994 (Fed.Cir.1991). Accordingly, where the Government presents a Certificate of Assessment for a tax period, the taxpayer will bear the burden of proving he is not liable for the assessment. To prevail in a § 6672 case, the taxpayer must establish by a preponderance of the evidence that the government’s imposition of the penalty against him is erroneous by proving that he was either not a responsible person or not willful. See, e.g., Mazo v. United States, 591 F.2d 1151, 1155 (5th Cir.1979), cert, denied, 444 U.S. 842, 100 S.Ct. 82, 62 L.Ed.2d 54 (1979); Brinshele v. United States, 88 Fed.Cl. 334, 339 (2009) (stating that, under § 6672, the plaintiff bears the burden of proof “both for his own claim and against the government’s counterclaim”).
In some circumstances, however, IRS assessments are not entitled to the presumption of correctness. The presumption does not apply to assessments that are “naked,” lacking in “[a]ny foundation whatsoever.” Janis, 428 U.S. at 441, 96 S.Ct. 3021. To be naked, an assessment must be completely unsupported by the evidence before the court such that the assessment is arbitrary and erroneous. See id. at 442, 96 S.Ct. 3021 (“proof that an assessment is utterly without foundation is proof that it is arbitrary and erroneous”). As the Seventh Circuit explained, for an assessment to be naked, it “must be more than incorrect”; rather, it must be arbitrary so that the assessment has “no support and the true amount of tax owed is incapable of being ascertained.” Schroeder, 900 F.2d at 1149; see also Cook v. United States, 46 Fed.Cl. 110, 114-15 (2000) (finding that an assessment is not naked if it is supported by any admissible evidence in the record, even if that evidence is different from that originally relied upon by the IRS or is first disclosed in discovery).
In this case, the Government has established that valid assessments were made because it has filed the Certificates of Assessments for all of the tax periods at issue. See Rocovich, 933 F.2d at 994 (stating that a “Certificate of Assessments and Payments is routinely used to prove that a tax assessment has in fact been made” and is “presumptive proof of a valid assessment”). Therefore, unless Kobus can show the assessments were naked, the IRS’s penalty assessments are entitled to a presumption of correctness.
The record shows that the IRS began investigating Village Turf and Kobus in July
When Shrewsbury recommended that the IRS assess Kobus with the penalties, the evidence supporting a finding of willfulness was weaker than it is now. Nonetheless, the IRS’s final determination that Kobus acted willfully was not arbitrary because it was based on evidence, including Village Turfs withholding-tax returns showing a balance due, Kobus’s status as a corporate officer, Shrewsbury’s observations of the store, information from the attorney, and the bank records; the determination was not lacking in “any foundation whatsoever.” Even if the evidence was somehow insufficient at the time the IRS assessed the penalties, the information currently in the record supports the IRS’s determination and the penalties are neither arbitrary nor erroneous. Because the IRS’s assessments are supported by evidence in this record, they cannot accurately be characterized as naked.
Kobus actually is arguing that, because he refused to cooperate with the IRS, the IRS had insufficient information to determine whether he acted willfully and the assessments therefore were naked. That argument is not persuasive. Nor is the Court persuaded by Kobus’s argument that he is unfairly prejudiced by the missing financial records. Kobus claims that he was cooperative with the IRS and argues that he could not provide the IRS with any information because all of his business records were destroyed or missing. Tr. at 64, 67-68. However, Kobus knew the IRS was investigating him by October 2003, when he hired Schiba-ni, and he knew that the IRS had requested Village Turfs payroll and financial information. At the time, Village Turf had most of its physical and electronic financial records; it was not until 2004 and 2005 that most of Village Turfs financial records were lost or destroyed. If Plaintiff had cooperated with the IRS from the outset, he could have provided the records to the IRS to show his asserted lack of willfulness.
The Government contends that, because Kobus permitted evidence to be destroyed, it is entitled to “an adverse inference based on plaintiffs spoliation of Village Turfs financial, tax, and other business records.” Def.’s Memo Fact & Law, at 29. Were the Government to bear the burden of proof on any elements in this ease, the Court would need to decide whether Plaintiff should be liable for spoliation.
The Court finds that the IRS’s determination that Kobus was willful was not arbitrary and erroneous. The Government has established that the IRS properly assessed Kobus with the penalties and that the penalties are
B. Willfulness
The IRS may assess a personal penalty, equal to the amount of the taxes not paid by the employer, on any person who (1) is required “to collect, truthfully account for, and pay over” withheld taxes (someone who is a “responsible person”), and who (2) “willfully” fails to collect, account for, or pay such tax or “willfully” evaded or defeated the tax.
First, a person acts willfully if he has actual knowledge of a past or present withholding-tax deficiency and he voluntarily chooses not to pay the United States.
Second, even in the absence of actual knowledge, a person is liable if he acts with a reckless disregard of the facts and obvious and known risks that presently-due withholding taxes are not being paid. Bolding, 565 F.2d at 672, 674; Godfrey, 748 F.2d at 1577. A responsible person may not “immunize himself from the consequences of his actions by wearing blinders which will shut out all knowledge of the liability for and the nonpayment of its withholding taxes.” Bolding, 565 F.2d at 674. For example, a person acts with reckless disregard if he fails to “investigate or to correct mismanagement after being notified that withholding taxes have not been duly remitted.” Godfrey, 748 F.2d at 1578 (quoting Mazo, 591 F.2d 1151).
Kobus’s main argument is that he was merely negligent in mismanaging Village Turf and his actions do not rise to the level of willful. He claims that he never had actual
The Government contends that Kobus knew or should have known that Village Turf was not remitting its withholding taxes. The Government asserts that Kobus either knowingly or recklessly failed to re-delegate the duty to prepare and remit taxes when Woods left in 1997. Accordingly, the Government asserts that Kobus is liable from 1997 forward. The Government also argues that Plaintiff incurred liability for tax periods 1996 to 2001 when Village Turf filed the delinquent withholding-tax returns in April 2002. Subsequently, Kobus had actual knowledge of the tax deficiencies and he permitted Village Turf to pay substantial sums to other creditors instead of using those funds to satisfy the tax deficiencies.
Kobus also advances several other arguments for why he should not be liable for the penalties. He claims that, in recognition of his lack of business knowledge, he delegated the duty to pay taxes to Lagasse in 2001 or 2002. He claims he had no reason to think that Lagasse would not pay the taxes, and therefore, his delegation of tax matters to Lagasse should absolve him from responsibility for the unpaid taxes. Kobus also argues that the “willfulness” standard is a tort-like standard, and therefore, the Government should be held to some standard of care. He argues that even if he was negligent, the Government also was negligent because it did not try to collect on the 1996 to 2001 deficiencies until 2003.
In response, the Government argues that, even though Kobus hired Lagasse to manage the retail store in 2001, Kobus did not delegate the duty to pay all of Village Turfs taxes to Lagasse. It maintains that, even if Kobus did delegate the duty to Lagasse, Kobus is liable for the 2001, 2002, and 2003 taxes because the withholding-tax returns Village Turf filed in 2002 provided notice to Kobus that Lagasse was not paying the taxes and Kobus took no action to correct the problem. Finally, the Government argues that Plaintiffs negligence theory is actually a laches theory, and it is well-settled that lach-es does not apply to the Government. Closing Arg. Tr. at 58.
For the reasons that follow, the Court finds that Kobus willfully failed to pay over the withholding taxes to the Government for all tax periods at issue. For the purposes of analysis, the Court has divided the relevant time periods into 3 groups based on Village Turfs administrative employees: during Woods’s tenure, from 1996 to March 1997; during Clay’s tenure, from March 1997 to June 2001; and during Clay’s and Lagasse’s joint tenure, from June 2001 through Q4 2003.
1. From 1996 to March 1997 — While Woods Was Responsible for Preparing the Payroll
The parties agree that Village Turf remitted most of its withholding taxes in 1996, but it missed a few payments for that tax year. Village Turf deposited $39,556, but left an unpaid withholding-tax balance of $5,745. Stip. ¶ 199. At the time, Kobus had delegated the duty to pay taxes to Woods, and he had no reason to suspect that withholding taxes were not being paid. The Court finds that in 1996, Kobus lacked actual knowledge that Village Turf was not remitting its withholding taxes and he reasonably had delegated the duty to pay withholding taxes. Therefore, the Court finds that Kobus did not willfully fail to pay the taxes in 1996.
Nonetheless, Kobus is liable for the 1996 tax penalty
Kobus stipulated that he knew about the 1996 tax deficiencies by April 2002 when Village Turf filed the delinquent return. He also stipulated that Village Turf paid out at least $500,000 in 2002
The terms “encumbered” and “unencumbered” have not been defined by the Supreme Court or the Federal Circuit in this context. The Eighth Circuit has described encumbered funds as: “Where the taxpayer’s discretion in the use of funds is subject to restrictions imposed by a creditor holding a security interest in the funds which is superior to any interest claimed by the IRS, the funds are regarded as encumbered if those restrictions preclude the taxpayer from using the funds to pay the trust fund taxes.” Honey, 963 F.2d at 1090 (quoting In re Premo, 116 B.R. 515 (Bankr.E.D.Mich. 1990)). Several other circuits have adopted the Eighth Circuit’s definition. See United States v. Kim, 111 F.3d 1351, 1359 (7th Cir. 1997); Barnett v. Internal Rev. Serv., 988 F.2d 1449, 1458 (5th Cir.1993). The Court is persuaded that the Honey definition is consistent with both the purpose of § 6672 and Federal Circuit precedent; personal liability will attach only when the employer had funds that could have been paid to the IRS and the taxpayer chose not to pay the IRS.
Kobus claims that after he opened the retail store, all of Village Turfs funds were encumbered by UCC security agreements with Southern States and other creditors. Kobus asserts that the security agreements covered all of Village Turfs bank accounts
The Government contends that despite the seemingly broad language of the security agreements,
The record shows that, during the time when Kobus alleges all his funds were encumbered, Village Turf was paying substantial sums to other creditors. For example, in 2002, Village Turf paid $325,997 in wages, $8,862 in repairs and maintenance, $31,236 in advertising, $30,956 in insurance, and $5,466 in supplies. Stip. ¶ 144. At no time did its creditors tell Village Turf that it could not use its revenues to pay for business expenses. See Tr. at 442-44. Moreover, the creditors must have contemplated payment of revenues to other entities because the agreements specifically required Village Turf to pay any taxes or levies incurred on inventory and to purchase insurance for the inventory. Ex. 78. As a matter of logic, it would make no sense for Village Turfs creditors to forbid it from using revenues to pay for operating expenses; if they did, the company would have no funds that could be used to rent a store, pay wages, or pay any other bills, and it would impossible to actually run the business. The Court finds that the security agreements did not preclude Village Turf from using funds to satisfy ordinary business expenses such as wages, taxes, and insurance.
The Court finds that Kobus has not proven that Village Turfs financial assets were encumbered such that he had no discretion to pay the withholding-tax liability out of the store’s revenues. See Honey, 963 F.2d at 1090-91 (taxpayers had burden of proving all funds in an account were proceeds from sale of inventory and therefore encumbered by security interests). The parties have stipulated that Village Turf paid to other creditors at least $500,000 in 2002 and at least $400,000 in 2003. Stip. ¶¶ 144, 148. The Court finds that those funds were unencumbered because Village Turf had discretion to use those funds to pay its operating expenses.
The Court finds that after Kobus knew about the 1996 tax deficiency in April 2002, Village Turf had unencumbered funds available and Kobus chose to use those funds to pay other creditors instead of the Government. Therefore, Kobus willfully failed to pay Village Turfs withholding taxes for 1996, and he is liable for the penalty.
2. From March 1997 to June 2001— While Clay Was Responsible for Preparing Payroll
It is undisputed that, up until March 1997, Plaintiff had delegated the duty to pay withholding taxes to Woods, and Village Turf was filing the appropriate returns and remitting most of the taxes. In March 1997, however, Village Turf stopped making its withholding-tax deposits altogether, and it never resumed making them. It also stopped filing its withholding-tax returns, an oversight it did not correct until 2002. The parties stipulated that, after Woods retired in early 1997, Plaintiff did not re-delegate the duty to remit withholding taxes or to prepare the withholding-tax returns. Plaintiff explained that he assumed that new personnel were doing the same tasks as former personnel and he did not exercise any supervision over his office staff. Tr. at 26-29.
Plaintiff urges the Court to find that his mismanagement of Village Turf was merely negligent. Kobus claims he was preoccupied with the operations side of the business and he overlooked reassigning the duty to handle payroll and withholding taxes. Kobus admits he should have supervised his office staff, but asserts that being a bad business manager does not make him culpable and liable for the penalty.
The Court cannot accept Plaintiffs argument. Kobus characterizes his mistake as
After Woods left Village Turf, there were many warning signs that something was wrong with the company’s finances. First, Village Turf stopped making periodic withholding-tax deposits. Between February 5, 1996 and March 28, 1997, Village Turf made 16 tax deposits
When Village Turf stopped making the deposits, Plaintiff would have stopped signing a large, recurring cheek. Kobus testified that his failure to notice this change was merely negligent and explained that he was not focused on office tasks and often did not read the documents he signed. Even if signing payroll checks was an administrative duty to which he did not pay much attention, it is difficult to believe that Kobus did not notice the absence of a large check each period. In 1997, Kobus was Village Turfs only corporate officer and the only person with cheek-signing authority. The Court finds it incredible that Kobus would not have noticed the elimination of such a large, recurring expense. Kobus cannot avoid responsibility for his obligations by adopting a practice of signing documents without reading them, so that he would not have noticed whether or not a recurring check ceased to be presented for his signature. See Bolding, 565 F.2d at 673-74 (finding that the responsible person should be charged with knowledge of non-payment in part because he was not asked to sign or countersign checks for payroll tax deposits).
Second, Village Turf stopped filing its annual withholding-tax returns. Kobus was the sole corporate officer at this time and was responsible for ensuring that the corporation complies with its duties. He should have noticed that he no longer was signing and filing a withholding-tax return. As before, Kobus cannot excuse his failure to notice the missing tax returns by arguing that he never read the documents he signed.
Third, after Village Turf stopped remitting the withholding taxes, it would have had a substantial increase in available revenue. For tax year 1996, Village Turfs tax deposits totaled $39,556, Stip. ¶ 199, and its total revenue was $414,000, Ex. 45. Thus, Village Turfs tax deposits in 1996 comprised nearly 10% of its total revenue. Kobus testified that he did not notice the increase in revenue because the business was “struggling” at that time. Tr. at 132-33. Rather than explain his failure to notice the change, that the business was having trouble makes it all the more suspicious; a business owner who is experiencing trouble is more likely to seruti-
Finally, after Woods left, the payroll duties were taken up by Clay. Clay admitted that she prepared the payroll, but testified that it was never her duty to pay taxes. Tr. at 209-12. Although Plaintiff stipulated that no one was responsible for paying withholding taxes because he never re-delegated the duty to pay them, Plaintiff testified at trial that he delegated the duty to pay withholding taxes to Clay. Whatever the precise scope of duties that Kobus assigned to Clay, the record shows that between March 1997 and June 2001 Clay was the only person who was responsible for the payroll. Kobus testified that he did not train Clay and that he did not exercise any oversight over her. At the time, Clay had no legal obligations to the company because she was never an employee and she was not made a corporate officer until May 2000. Had Kobus exercised any supervision over Clay’s performance of her duties, he would have noticed that withholding taxes were not being paid. Kobus, who for several years had been collecting and remitting withholding taxes, would have known that the preparation of payroll necessarily entails tax issues even if he did not know precisely what those issues were. The Court does not agree that it is mere negligence to entrust payroll duties to a non-employee without exercising any supervision over the person.
It seems unlikely that Kobus could have been so oblivious to Village Turfs finances that he would not have known that Village Turf was not remitting its withholding taxes, and the Court finds that Kobus more likely than not knew what was going on. But even if the Court were to credit his testimony that he had no idea what was going on, it would find that Kobus deliberately disregarded an obvious risk that taxes would not be paid by completely ignoring the financial side of the business. Kobus, who was Village Turfs sole corporate officer until 2000, cannot immunize himself from liability through a “deliberate or reckless disregard of the facts and known risks_” Bolding, 565 F.2d at 674; see Teets v. United States, 29 Fed. Cl. 697, 712 (1993) (holding that a responsible person’s “ignorance does not relieve him from liability. Certainly, if he did not know, he should have known.”).
The Court finds that Kobus knew Village Turf was not remitting its withholding taxes in 1997. Kobus took no corrective actions until June 2001, when Kobus allegedly delegated the duty to pay taxes to Lagasse. Therefore, if Village Turf had funds available that could have been used to pay creditors, Kobus will be liable for the penalty. The record shows, and the parties agree, that between 1997 and 2001 Village Turf paid funds to other creditors well in excess of its withholding-tax liabilities
3. From June 2001 to 2003 — While Both Clay and Lagasse Had Payroll Preparation Duties
Village Turf opened the retail store in June 2001. Kobus asserts that he should not be liable for the penalties incurred by the store because he had delegated the duty to pay the retail store’s taxes to Lagasse.
Kobus maintains that when he asked La-gasse to investigate Village Turfs tax problem, Lagasse took over the duty to pay both the past deficiencies and the presently-due withholding taxes incurred by the landscaping operation. Kobus testified that he toned the whole problem over to Lagasse and he did not exercise much oversight over Lagasse’s handling of the situation. Tr. at 61-62, 169. Kobus testified that he occasionally checked up on the issue by asking La-gasse about the status of negotiating a plan with the IRS, but that Lagasse always told him he would have a solution soon. Then, Lagasse resigned. Tr. at 50-52.
Kobus appears to assert that part of the reason he hired Lagasse in 2001 was to take care of Village Turfs tax problem. Pl.’s Memo Fact & Law, at 6; Closing Arg. Tr. at 5-6. However, Kobus also claims that he did not know about the tax problem until 2002. Kobus backed away from his assertion at trial when he testified that, although he had Lagasse help him with some financial issues before the store opened, he did not think the issues were tax related. Tr. at 119-21. Ko-bus also tried to back away from his admission that he knew about the tax deficiencies in April 2002, see Closing Arg. Tr. at 44; Kobus testified that, while he knew Village Turf had a tax problem in 2002, he did not necessarily know that the withholding taxes were not being paid because he did not read the withholding-tax returns that Village Turf filed. Tr. at 163-70. Kobus had stipulated, however, that he knew that Village Turf had unpaid withholding-tax liabilities on April 14, 2002, when Village Turf filed the tax returns for 1996 to 2001. Stip. ¶ 178 (“On 4/14/2002, ... Kobus knew that Village Turf had unpaid employment tax liabilities to the IRS for each of [the tax years 1996 to 2001]”).
Kobus’s testimony was unclear on a number of issues because it frequently contained exchanges such as the following excerpt from his cross-examination.
Q Did you delegate to Mr. Lagasse the responsibility of filing Village Turfs employment tax returns from the date you gave him the [fix-the-tax-problems] job until the day he left the company?
A I would think that as Dan [Lagasse] went through and had talks, supposedly talked with the IRS and the state and our creditors, that he came up with a plan and if he needed to do some filing, he would have brought that to my attention.
Q Did you tell him that it was his job to file those returns?
A I told him he had the authority to file those returns if he had to refile them. Q Did you tell him it was his responsibility to file the returns?
A Did I put it in writing with his name on it and hand it to him? No. You’re absolutely right, I didn’t do that.
Q That’s not what I asked. I asked did you tell him that it was his responsibility to file the returns?
A No, not in so many words.
Q Did you tell Mr. Lagasse that it was his responsibility to pay federal tax deposits on all future tax periods to the IRS in connection with payroll obligations of Village Turf?
A Yes, when it came to the store.
Q It was his responsibility for the store? A Oh, yeah.
Tr. at 167-68.
In contrast, Lagasse testified that he had a much more limited scope of duties and that Kobus retained significant authority over the retail store’s financial affairs. Lagasse testified that he was hired to run the retail store, and his duties did not encompass taking care of taxes for the landscaping business. Tr. at 421-24. Lagasse testified that, while he had
Lagasse testified that the store always had trouble paying bills because Kobus only gave the store $5,000 in operating capital. Tr. at 437. Lagasse testified that he would have weekly or biweekly meetings with Kobus, where he would present Kobus with a list of accounts payable and accounts receivable. Kobus would go through the list of bills and decide which would get paid. Tr. at 436-40; Tr. at 463-66. Due to cash constraints, many bills were not immediately paid. La-gasse testified that his monthly reports showed the withholding-tax liabilities, and he repeatedly asked Kobus about whether Village Turf was paying these taxes. Tr. at 463-66. He testified that Kobus always told him not worry about the perceived problem because Kobus or Clay
Lagasse admitted that, in 2002, he helped Kobus investigate the withholding tax problems and that he prepared the withholding-tax returns for 1996 to 2001. He testified that he helped with the tax problem because Kobus asked him to, but it ordinarily was not his job to handle Village Turfs taxes. Tr. 444-46, 451-52.
The Court finds Lagasse’s testimony to be credible. His testimony was internally consistent. Based on Lagasse’s demeanor, it is the Court’s impression that Lagasse testified honestly and to the best of his recollection. This is in contrast to Kobus’s evasive testimony, which at times was ambiguous and contradictory. On several occasions, Kobus would not admit to facts that he had stipulated were true.
The Court finds that Plaintiff did not delegate the duty to pay taxes to Lagasse. The Court credits Lagasse’s testimony that he brought the unpaid taxes to Kobus’s attention and Kobus told him not to worry about it because it was being taken care of. The Court finds that Plaintiff retained control over the payment of bills and he did not permit Lagasse to pay the taxes without getting approval first. Therefore, the Court finds that Kobus knew in 2001 that the withholding taxes were not being paid and he knowingly chose not to pay over the withheld taxes to the Government.
Moreover, even if the Court were to credit Kobus’s testimony and find that Kobus delegated to Lagasse the duty to pay all of Village Turfs taxes, Kobus still would be liable for the penalties. Kobus hired La-gasse in 2001. By April 2002, Kobus knew that Village Turf did not pay its withholding taxes in 2001. If Kobus reasonably had delegated the duty to pay taxes to Lagasse in 2001, Kobus recklessly failed to start supervising Lagasse in April 2002, after Kobus learned that the 2001 taxes were not paid. At that point, he had a duty to correct La-gasse’s mismanagement and to exercise some oversight to ensure that the taxes were paid. Godfrey, 748 F.2d at 1578; see Mazo, 591 F.2d at 1157 (finding that, after a corporate official had actual notice of a deficiency, the official could not escape liability by delegating his responsibility to a subordinate). Ko-bus did not do so, and therefore, he knowingly or recklessly failed to remit the taxes.
As discussed above, Village Turf paid to non-seeured creditors over $500,000 in 2002 and over $400,000 in 2003. The Court finds that, between 2001 and 2003, Village Turf had unencumbered funds that it could have used to pay the tax deficiencies. Therefore, the Court finds that Kobus knowingly paid other creditors in preference to the United States, and he willfully failed to pay over withholding taxes from June 2001 through 2003. Accordingly, Kobus is liable for the penalties for those periods.
Before concluding its discussion of willfulness, the Court must address the other arguments made by Plaintiff. In his answer to the Government’s counterclaims, Kobus asserts that the Government’s claims are barred by laches. Pl.’s Am. Answer ¶ 32. In his briefings and oral arguments, Kobus admits that laches generally is not available against the United States. Pl.’s Memo Fact & Law, at 8. Instead, Kobus argues that the willfulness standard is a tort-like standard and therefore the Government should be held to a reasonable standard of care in initiating tax collection efforts. Id. at 4-5, 8; Closing Arg. Tr. at 8-9. According to Kobus, “The facts in this case are quite analogous to the defense of contributory negligence.” Pl.’s Memo Fact & Law, at 8. Had the Government taken enforcement actions sooner, Village Turf would have corrected its mistake without incurring such a large tax balance. Id. at 8-9. He asserts that the Government “needs to take responsibility for its inattention to the situation at Village Turf, Inc., as well.” Id. at 5.
The Government raises several arguments against Kobus’s theory. The Government first asserts that no inequity results by holding Kobus responsible for his willful failure to comply with the law. Def.’s Memo Fact & Law, at 17-18. Next, the Government argues that there is no authority for Kobus’s contributory negligence defense. Finally, the Government asserts that Kobus’s argument is actually a laches argument because he is claiming “that it would be inequitable, as a result of undue delay, for the Government to enforce the [withholding tax] penalties.” Id. at 18.
The Court finds that Kobus has advanced no meritorious basis for grafting a contributory negligence defense onto the willfulness standard under § 6672 and the Court perceives no reason to adopt such a defense in general. The Court also finds that it is not inequitable to hold Kobus responsible for the tax penalties, especially when the IRS acted within the statutorily provided time frame. The IRS generally must assess a tax within 3 years after the return was filed, 26 U.S.C. § 6501(a), but when a taxpayer fails to file a return, the tax may be assessed at any time, § 6501(e)(3). Village Turf filed returns for 1996 to 2001 in April 2002, and the IRS notified Village Turf of the delinquent taxes in May 2002. In May 2004, the IRS notified Kobus that he was being assessed with the personal penalties for 1996 to 2001 and Q2 and Q3 of 2002. Village Turf never filed withholding-tax returns for any quarter of 2003, and the IRS assessed Kobus with personal penalties in 2006. Kobus has not identified any inequitable conduct or delay by the IRS.
Kobus advances another equitable theory in his closing argument. He asserts that the Government has a duty to mitigate its damages, citing to Ketchikan Pulp Co. v. United States, 20 Cl.Ct. 164 (1990). Closing Arg. Tr. at 49. He asserts that the IRS knew of Village Turfs failure to pay taxes for 5 years before it took any action to collect. Id. In closing, he recognizes that many of his equitable theories were not raised in a pleading and he requests that the pleadings be amended to conform to the evidence. Id. at 50-51.
The Government admits that the Government has a duty to mitigate damages in contract actions, but asserts that the fact that a contracting party has a duty to mitigate damages does not mean that the Government has a duty to mitigate damages in actions that do not arise under contract law. Id. at 58-59. It also objects to Kobus’s request to amend the pleadings. Id. at 50.
The Court is not persuaded that the IRS must mitigate its damages. Ketchikan Pulp, which is a decision by another Court of Federal Claims judge, is not binding on this Court. Even if it were, Ketchikan Pulp is inapposite to this ease because it was a breach of contract case and has no relation to the tax matters at issue here.
C. The Amounts of the 2003 Assessments
The parties agree that the amounts of the assessments for 1996 to 2001 and for Q2 and Q3 of 2002, which were based on the withholding-tax returns that Village Turf filed, are accurate. Kobus asserts, however, that the 2003 penalty amounts are inaccurate and “arbitrary and capricious.” Pl.’s Am. Answer ¶ 31.
Village Turf did not file any withholding-tax returns for 2003, so Shrewsbury estimated Village Turfs 2003 liability and prepared substitute returns pursuant to IRS procedure. Tr. at 380-85; see 26 U.S.C. § 6020. Shrewsbury based her estimates on the numbers reported in Village Turfs Q2 2002 withholding-tax return. She estimated that, in all 4 quarters of 2003, Village Turf had the same wages as in Q2 of 2002, resulting in an annual wage estimate of $481,352.23. Stip. ¶¶ 282-84; Tr. at 382-84. She then estimated Village Turfs FICA liability and federal income tax withholding liability, using 20% as the tax withholding level. Tr. at 384-86; see Ex. 68 at 26-27. This brought Village Turfs total withholding-tax deficiency to approximately $130,000 for 2003. See Stip. ¶¶ 284-86.
Kobus argues that the Government bears the burden of proving the accuracy of the amounts of the 2003 penalty assessments because the penalties were based on estimates. He maintains that the assessments should be adjusted down based on the wages reported in Village Turfs 2003 Form 1120S, its corporate income-tax return. Kobus asserts that if the estimates were based on the more accurate numbers from the Form 1120S, Village Turfs total tax liability for 2003 would be $46,899.39. Pl.’s Memo Fact & Law, at 11. He also asserts that the IRS should have looked to the W-2s to get more accurate wage information.
The Government admits that the assessments were based on Shrewsbury’s estimates, but asserts that the penalty amounts are presumptively valid because the method for making the estimates was reasonable and logical. The estimates were calculated using the methodologies contained in the IRS’s field manual. Tr. at 382-86, 390; Stip. ¶¶ 282-85. Because the amounts are presumptively correct, the Government claims that Plaintiff bears the burden of proving that the amounts are incorrect and of proving the correct amounts. The Government also argues that the 2003 Form 1120S, which was filed on November 16, 2006, see Ex. 53, is not a reliable source for Village Turfs wages because the IRS had assessed Kobus with the 2003 tax penalties on October 24, 2006. It also notes that the IRS does not get access to the W-2s, which are filed with the Social Security Administration (“SSA”), until years after the forms are processed.
When a taxpayer does not maintain adequate records, the IRS can estimate the taxpayer’s liability. The presumption of correctness applies to all properly made assessments, including estimates, because if it did not, taxpayers could defeat any assessment by not maintaining proper records. Judge Firestone notes in Brinskele, “where the IRS estimates a tax liability because the taxpayer has failed to maintain adequate records ... courts have uniformly rejected challenges to the presumption of correctness associated with the IRS assessment.” 88 Fed.Cl. at 339. The Eighth Circuit has stated that, even if an assessment is an estimate, the presumption applies if “the method for making the estimate is reasonable and logical.” Ferguson, 484 F.3d at 1077. Similarly, the Seventh Circuit has found that “[w]hen a court is faced with an incorrect but otherwise valid assessment the proper course is not to void the assessment ... but to determine what, if anything, the taxpayer owes the government.” Schroeder, 900 F.2d at 1148.
In this case, while the IRS based the estimates on limited information, the estimates were not arbitrary and its actions were reasonable and lawful. The IRS did not have more information because Village Turf did not file a withholding-tax return or a timely income-tax return. Nor did Kobus cooperate in the investigation by providing
The Court finds that Kobus has not presented sufficient evidence for the Court to determine whether his actual withholding-tax deficiencies for 2003 are lower than the assessed amounts. Kobus asserts that the estimates are high, and points to Village Turfs 2003 Form 1120S and the W-2s of its employees. The Form 1120S, however, was filed after Kobus had notice of this dispute. It is not clear when the W-2s were filed, but Village Turf did not always file all of its W-2s,
The Court notes that it is troubled by the amounts of the 2003 penalties, which amount to $33,273.17 per quarter or over $130,000 for the year. In 2002, Village Turfs withholding tax liability was $20,075 for Q2 and $19,513 for Q3, or under $40,000 for the year. Stip. ¶¶ 261, 272. In 2001, its total withholding-tax liability was $75,473.
It seems plausible that the 2003 penalty assessments are higher than the actual amounts of unpaid withholding taxes. The parties stipulated that in 2003 Village Turf paid out at least $259,948 in wages, Stip. ¶ 148, although the Government asserts the wages could have been higher. Given the absence of any reliable evidence of Village Turfs 2003 wages, the Court cannot say that Kobus has proven by a preponderance of the evidence that the 2003 estimates were wrong. The Court speculates that a more accurate amount might be calculated by adjusting the income-tax withholding level to its historic level of around 10%. However, the record contains insufficient evidence due to the destruction of Village Turfs records for the Court to reach that conclusion.
The Court’s conclusion is colored by the Government’s assertion that Plaintiff permitted evidence to be destroyed. Between 2004 and 2006, most of Village Turfs paper records were destroyed and its electronic records were deleted. Were the record to contain some evidence in Plaintiffs favor on the proper amounts of the assessments, the Court would need to decide whether Plaintiff should be liable for spoliation. Had Village Tui’f retained all of its records, the Government could have had evidence to rebut Ko-bus’s claims. As discussed supra, Kobus was aware of the IRS’s investigation by October 2003, and he had an obligation to preserve Village Turfs financial records. Tr. at 140. Given these facts, the Government has presented a good ease for spoliation, but the Court does not have to reach that question because Kobus has not established the proper amount by a preponderance of the evidence.
D. The IRS’s Redemption of Kobus’s Home
The final question at issue in this case is whether the IRS improperly preferred itself to Kobus’s other creditors when it purchased and resold Kobus’s house after Southern States foreclosed on it. The IRS applied the profit it earned by reselling the house to Kobus’s tax balance. Kobus contends that
Between 2001 and 2007, several of Kobus’s creditors acquired interests in Kobus’s home. In early 2001, when Village Turf entered into the dealership agreement with Southern States, Kobus gave Southern States a deed of trust on his house. Later that year, Village Turf became involved with a zoning dispute with Fairfax County and the County assessed Kobus with over $100,000 in fines for various violations. In December 2001 and January 2005, the County entered money judgments against Village Turf and Kobus. Exs. 142, 144. Although the record in this case contains the County’s judgments, there is no evidence showing that the County filed those judgments as liens against Kobus’s personal home. Two years later, in January 2007, the IRS placed a tax lien on Kobus’s home as part of its effort to collect on the assessed penalties. The parties agree that Southern States, through the deed of trust, held a perfected lien on Kobus’s home and that Southern States’s lien was senior to the IRS’s tax lien and to any lien held by the County.
After the retail store went out of business, Village Turf still had an unpaid inventory balance with Southern States. On April 3, 2008, Southern States foreclosed on Kobus’s house. The house was sold at auction to a person who is not a party to this case and Southern States received the proceeds. Soon after the house was sold, the IRS elected to exercise its statutory right to “redeem” the house by purchasing it from the winner of the auction for the purchase price. Stip. ¶ 296; see 26 U.S.C. § 7425(d). The IRS then resold the property for a profit, and it applied the proceeds to Kobus’s unpaid penalty balance. Stip. ¶¶ 296-97.
Under federal law, if the IRS holds a valid tax lien on a property, it acquires a right to redeem the property whenever a senior creditor forecloses on the property and thereby discharges the tax lien. § 7425(d); Treas. Reg. § 301.7425-4(a) (2010). The IRS can redeem the property after the senior lien-holder sells the property at a public auction by purchasing it from the buyer for the purchase price paid plus interest and costs. The IRS then may try to resell the property at higher price and apply any profit to the taxpayer’s liability. Southwest Prods. Co. v. United States, 882 F.2d 113, 117-18 (4th Cir.1989). The provision allows the IRS to capture the difference between the auction price, which is usually a distress price, and the property’s fair market value. Id. at 118. The IRS’s right of redemption is separate from any rights it has as a junior lien holder.
Kobus does not dispute that the IRS had a right to redeem the property. Instead, he asserts that the IRS should have paid to Fairfax County the profits it received from redeeming and reselling Plaintiffs house. Kobus contends that, because Fairfax County had a senior lien on the property, it was a senior creditor to the United States. Therefore, Kobus argues, Fairfax County was entitled to be paid the funds the IRS received from the resale.
The Government advances two arguments asserting that Kobus has not alleged a basis for recovery.
Second, the Government argues that, even if the County had a valid lien, the lien was extinguished when Southern States foreclosed on the property. Again, the Court agrees with the Government. Under Virginia law, junior liens are discharged when a senior lien-holder sells the property. Schmidt and Wilson, Inc. v. Carneal, 164 Va. 412, 180 S.E. 326, 326-27 (1935); Southwest Prods., 882 F.2d at 115 n. 1 (stating that if a senior creditor forecloses on a property, “under Virginia law junior liens ... are discharged at the time of sale”). During closing arguments, Kobus agreed that a foreclosure sale by a senior lien holder cut off the rights of junior lien holders. Closing Arg. Tr. at 38-40.
Thus, when Southern States sold the property, all junior interests were extinguished, including the IRS’s lien and any lien held by Fairfax County. Even if the County’s lien was senior to the IRS’s lien on the property, that relationship was extinguished when Southern States foreclosed. Because Southern States’s foreclosure completely extinguished the interests of all junior creditors, the IRS was under no obligation to pay any of the redemption proceeds to Fairfax County. So even assuming Fairfax County had a perfected interest in the property, that interest was cutoff and the IRS properly applied the redemption proceeds to Kobus’s tax balance. Accordingly, the Court finds that Ko-bus has not established that the Government must remit the proceeds of the sale to Fair-fax County.
III. Conclusion
For the reasons set forth above, Plaintiffs request for a refund is DENIED and the Government’s counterclaims are GRANTED. The Government represented that collection efforts have been ongoing. Therefore, the Government is ordered to obtain updated account and balance information. The parties are ordered to confer and if possible stipulate as to the correct outstanding balances on Plaintiffs accounts. The parties shall file a joint status report by Thursday, March 29, 2012.
. Citations to the trial transcript will be "Tr. at —” and citations to the closing argument transcript will be "Closing Arg. Tr. at —
. FICA taxes are comprised of a 12.4% tax for Social Security and a 2.9% tax for Medicare, with half being paid out of employee wages and half being paid by the employer. §§ 3101, 3111. Only the employee's half of the FICA tax is considered a withholding tax. The effect of this system is that every employee's salary is actually 7.65% higher than listed on a paycheck because the employer is making a FICA tax payment on behalf of the employee that the employee does not see.
.At the times at issue in this case, the funds were paid over to the IRS by making a deposit at a bank with a tax coupon. Now payments can be made electronically. Tr. at 367.
. The IRS also assessed the § 6672 penalties on Susan Clay, and she and Kobus are jointly liable for the penalties. From 2000 to 2002, Clay was listed as the corporate secretary on Village Turf's state registration. Her role in this matter is discussed in detail, infra.
. Kobus also entered into similar agreements with Wetsel, Inc., another company that sold agricultural products. Stip. ¶ 88.
. Lagasse’s official title was “regional manager." At the time, Kobus planned on opening a number of stores, and he hired Lagasse to help him open and manage all of them. Tr. at 415-17; see Tr. at 193.
.In 2003, Kobus’s efforts at separating the businesses were incomplete because he filed a joint federal-income-tax return (Form 1120S) for the two businesses for that year. Stip. ¶ 112; Ex. 53 at 1, 9; Tr. at 408-09. Additionally, it does not appear from the record that Kobus transferred Village Turf’s agreements with Southern States to VTSS.
. Clay testified that her payroll preparation duties involved entering hours and generating paychecks. Clay explained that she would take the hours from the timesheets for each employee and post them to the payroll system, which would apply the payroll rates and print the checks. Tr. at 189-90. She testified that the system probably printed out checks for tax deposits as well, but that she did not specifically recall, id.
. Lagasse explained the scope of his payroll preparation duties. Lagasse testified that after he set up each employee’s profile in the payroll system, the system automatically calculated wages and taxes, and it could generate reports. Tr. at 426-28. Each pay period he would enter the hours worked and the system would generate the checks. Id.
. The parties agree that, in early 2002, Kobus gave Lagasse a box that contained correspondence from the IRS, some of which was not opened, and that Kobus told Lagasse that Clay was responsible for the tax problems. Stip. ¶¶ 125-26; Tr. at 444-45.
. Prior to opening the retail store, Village Turf filed annual withholding-tax returns because it was a seasonal employer. After opening the retail store, Village Turf began filing quarterly withholding-tax returns, as done by ordinary.
. When asked to explain why the IRS waited until July 2003 to begin investigating Village Turf when no withholding-tax returns were filed for many years, Shrewsbury testified that she could "only assume that getting the [delinquent] returns filed [in April 2002] made the balances larger and made it more reasons [sic] to issue the case to the field.” Tr. at 379.
. Shrewsbury's notes reflect that Kobus told her the landscaping business was out of business but at another point in the conversation he said that it currently had 3 employees. Ex. 66 at 19-20.
. A party is liable for spoliation if (1) the party controlling the evidence had an obligation to preserve it; (2) the evidence was destroyed with a "culpable” state of mind; and (3) the evidence was relevant. The burden of proof for the 3 factors is on the party seeking to use the missing evidence. Jandreau v. Nicholson, 492 F.3d 1372, 1375 (Fed.Cir.2007) (describing the "general rules of evidence law”).
. The parties agree that Kobus was a responsible person.
. A taxpayer will be liable for an already-incurred deficiency if he was a responsible person both at the time the deficiency arose and at the time funds are paid to another creditor. See Slodov, 436 U.S. at 245-46, 98 S.Ct. 1778. There is no question that Plaintiff was a responsible person during all relevant periods.
. Though the Court is referring to the 1996 tax period, this analysis applies to January to March of 1997 as well.
. It is not clear from the record when in 2002 the funds were spent, and it is likely that some were spent before April. However, Village Turf was a seasonal business and most of its expenses likely occurred during Q2 and Q3 2002, which were the busy months. For example, Village Turf paid out $101,711 in wages in Q2 2002 (April 1 to June 30), Stip. ¶¶ 256, 261; and $96,482 in Q3 2002 (July 1 to September 30), Stip. ¶¶ 267, 272. See also Ex. 52.
. Between 2001 and 2003, Village Turf maintained separate bank accounts for the landscaping and retail operations. Stip. ¶ 95. While the bank account for the retail store may have been subject to the security interests, Village Turf’s account at Burke & Herbert was used exclusively for its landscaping operations and would not have been subject to the security interests. Therefore, any funds in the Burke & Herbert account would have been unencumbered.
.For example, the security agreement with Southern States provided: that Village Turf granted Southern States a "security under the Uniform Commercial Code” in "[a]ll accounts and inventory at any time hereafter acquired” and in "[a]ll proceeds of such accounts ... and inventory-” Ex. 78.
. Those payments were allocated to the 1995, 1996, and 1997 tax periods. Stip. ¶ 162. The payments included both the employer and employee FICA taxes.
. See also Fraass Surgical Mfg. Co. v. United States, 571 F.2d 34, 40 (Ct.Cl. 1978) (finding that a contract clause was enforceable and calling the testimony of the plaintiff corporation's president that he did not read the contract "irrelevant and unacceptable” and stating that "an experienced businessman ... should know better”); Upton v. Tribilcock, 91 U.S. 45, 50, 23 L.Ed. 203 (1875) (stating "[fit will not do for a man to enter into a contract, and, when called upon to respond to its obligations, to say that he did not read it when he signed it, or did not know what it contained”).
. According to the withholding-tax returns, the unpaid withholding taxes were $150,279. See Exs. 26-31. Between 1997 and 2001, Village Turf paid out many hundreds of thousands of dollars which included wages, maintenance, rent, supplies, insurance, and advertising. See Stip. ¶¶ 65-76.
. Kobus seems to assert that it was Lagasse’s duty to pay taxes for both the landscaping operations and the retail store, but his testimony was unclear.
. At this time, Clay still was taking care of any payroll for the landscaping operations.
. In Ketchikan Pulp the Court stated that Government had “a duty to mitigate its damages when a purchaser or seller breaches its contract” and it found that the Government in that case properly sold timber to another purchaser to offset the damages incurred when the original purchaser backed out. Ketchikan Pulp, 20 Cl.Ct. at 166-67.
. The SSA did not receive Lagasse’s W-2s for 2001, 2002, and 2003, and Lagasse had to write letters to the SSA to get the records corrected. Exs. 150, 152; Tr. at 455-56.
. Village Turf’s wages for 2001 were $462,243. Stip. ¶ 246; Ex. 31. The IRS’s wage estimate for 2003 was $481,352.23. Stip. ¶¶ 283-84.
. The Government also argues in passing that Kobus does not have standing to challenge the sale. The parties have not pursued or fully briefed the standing issue. The Court therefore will assume that Kobus has standing because, whether the Court considers this issue based on standing or on the merits, the result is the same: Kobus is not entitled to any recovery.