Albert A. Alsheskie, Plaintiff-Counter-Defendant-Appellee v. United States of America, Defendant-Counter-Claimant-Appellant

31 F.3d 837, 94 Daily Journal DAR 10656, 94 Cal. Daily Op. Serv. 5833, 74 A.F.T.R.2d (RIA) 5498, 1994 U.S. App. LEXIS 19791, 1994 WL 390731

• Court: Court of Appeals for the Ninth Circuit
• Decided: July 29, 1994
• Docket: 93-55003
• Status: Published

Opinions

Opinion by Judge FARRIS; Dissent by Judge TROTT.

FARRIS, Circuit Judge:

The district court held that Albert Alshe-skie, president of Lion Manufacturing, Inc., was not liable for penalties assessed against him under 26 U.S.C. § 6672 based on Lion Manufacturing’s failure to pay its 1986 taxes in full. The government appeals. We have jurisdiction pursuant to 28 U.S.C. § 1291. We affirm.

The controlling law is settled. The Internal Revenue Code requires certain employers to withhold and pay over federal income taxes and social security taxes from the wages of their- employees. See 26 U.S.C. §§ 3102, 3402. Section 6672 is one means available to the government to insure that income taxes are withheld and paid over. To incur liability under § 6672, a person must be a “responsible party” who willfully fails to collect and pay over taxes that are due.¹ Purcell v. United States, 1 F.3d 932, 937 (9th Cir.1993). A “responsible party” is one who has the “final word as to what bills should or should not be paid, and when.” Dudley v. United States, 428 F.2d 1196, 1201 (9th Cir.1970). One has the “final word” over what bills should be paid if he has “the authority required to exercise significant control over the corporation’s financial affairs.” Purcell, 1 F.3d at 937.

FACTS

In the fall of 1985, Pro Quality Enterprises, d/b/a/ Pro Quality Manufacturing, Inc., a sheet metal manufacturing company, defaulted on a financing contract with Lion Financial Services, d/b/a Commercial Financing Services. Commercial Financing then took possession of Pro Quality’s assets and formed Lion Manufacturing, Inc. to continue Pro Quality’s operations. Commercial Financing and its president, Lynn Sopwith, were the only shareholders of Lion Manufacturing. Alsheskie became Lion Manufacturing’s president and chairman of the board in November 1985. He held these positions at all times pertinent to the issue before the court. His duties included (1) managing the corporation’s day-to-day activities, (2) hiring and firing employees, (3) setting employees’ wages, (4) signing payroll checks and cheeks to creditors and (5) preparing accounting records. He also prepared and signed all of Lion Manufacturing’s tax returns.

Under its financing agreement with Commercial Financing, Lion Manufacturing turned over all checks received to Commercial Financing, which returned 20% of those funds to Lion Manufacturing, Inc. Alsheskie used those funds to pay employee wages. The funds were not used to pay Lion Manufacturing’s tax obligations. It is undisputed that by February 1986, Alsheskie knew that Lion Manufacturing was delinquent in paying its federal employment taxes, a matter that he discussed with Lynn Sopwith. Sopwith assured Alsheskie that he would take care of the tax problems “later.” In May 1987, Alsheskie and a partner bought Lion Manufacturing from Commercial Financing Services. Prior to May 1987, Alsheskie had no ownership interest in Lion Manufacturing.

In October 1988, the IRS made an assessment against Alsheskie under § 6672 for $69,162 for the first three quarters of 1986 and the third quarter of 1987. After a hearing, the district court determined that Alshe-skie was not a responsible party during 1986 for purposes of § 6672 and that he did not willfully fail to pay Lion Manufacturing’s taxes during this period. However, the court concluded that by 1987, when Alsheskie became Lion Manufacturing’s co-owner, he was a responsible party and did willfully fail to pay the company’s taxes. The court upheld that IRS’s assessment for the third quarter of 1987, but not for the first three quarters of 1986. The government appeals.

DISCUSSION

We review the factual determination that Alsheskie was not a responsible party who willfully failed to pay taxes for clear error. Maggy v. United States, 560 F.2d 1372, 1375 (9th Cir.1977), cert. denied, 439 U.S. 821, 99 S.Ct. 86, 58 L.Ed.2d 112 (1978); see also Raba v. United States, 977 F.2d 941, 943 (5th Cir.1992).

The record satisfies us that the district court’s pivotal conclusion (wherein the court summarized its factual findings) is Conclusion of Law #16. The court found that

even though Alsheskie was the titular head of the Corporation, had sole signature authority over its only cheeking account and signed numerous checks, signed contracts, hired and fired employees and managed the day to day operations of the corporation, he did not have discretionary authority to pay the Corporation’s withholding taxes during the first three quarters of 1986. Rather the control that [Commercial Financing] maintained over the financial operations of [Lion Manufacturing], through its accounts receivable financing arrangement, precluded Alsheskie from paying the Corporation’s tax obligations.

(emphasis added). We cannot say upon the record before us that the finding lacks support or that it fails to support the ultimate conclusion.

Alsheskie was an employee, not an owner during the critical period. His authority was limited not by the directions of the owners of Lion Manufacturing, see Brounstein v. United States, 979 F.2d 952, 955 (3d Cir.1992); Roth v. United States, 779 F.2d 1567, 1572 (11th Cir.1986); Howard v. United States, 711 F.2d 729, 734 (5th Cir.1983), but by the financing arrangement. He did not have “significant control” over what bills to pay or not pay since that control remained, as the district court found, with the parent corporation, Commercial Financing.

Hochstein v. United States, 900 F.2d 543 (2d Cir.1990) does not require a different result. In Hochstein, the record contained no evidence that Hochstein, the responsible party, was without authority to pay the taxes. Here, in contrast, Alsheskie submitted an affidavit stating that

Leon Lyon [Chairman of the Board of Commercial Financing] and Lynn Sopwith played key and integral roles in financing the operations of Lion Manufacturing, Inc. and their control over the financial operations of Lion Manufacturing essentially precluded me from exercising the degree of autonomy, authority and control necessary to be able to pay the payroll tax liabilities of Lion Manufacturing, Inc. ... on a timely basis.

The government chose not to cross examine Alsheskie or rebut his affidavit with contrary testimony. The district court did not clearly err in holding that Alsheskie was not a responsible party.

The taxes are due and must be paid, but Alsheskie is not a responsible party and therefore not subject to the penalty of § 6672.²

AFFIRMED.

1 . Section 6672(a) 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 ... shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax ... not collected ... and paid over.

26 U.S.C. § 6672.

2 . Since we affirm on the basis that Alsheskie was not a "responsible party” within the meaning of § 6672, we need not address the district court’s conclusion that Alsheskie's failure to pay the taxes was not willful.