USCA1 Opinion
United States Court of Appeals
For the First Circuit
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No. 96-1582
ARNOLD W. VINICK,
Plaintiff - Appellant,
v.
COMMISSIONER OF INTERNAL REVENUE,
Defendant - Appellee.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Mark L. Wolf, U.S. District Judge]
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Before
Stahl and Lynch, Circuit Judges,
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and Woodlock,* District Judge.
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Howard R. Palmer with whom Lawrence F. O'Donnell and O'Donnell,
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O'Donnell & O'Donnell were on brief for appellant.
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Theresa E. McLaughlin, Assistant United States Attorney, with
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whom Loretta C. Argrett, Assistant Attorney General, Donald K. Stern,
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United States Attorney, and Sarah K. Knutson, Attorney, Tax Division,
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Department of Justice, were on brief for appellee.
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April 8, 1997
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*Of the District of Massachusetts, sitting by designation.
STAHL, Circuit Judge. Plaintiff-Appellant Arnold
STAHL, Circuit Judge.
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W. Vinick ("Vinick") appeals the grant of summary judgment in
favor of Defendant-Appellee, Commissioner of Internal Revenue
("IRS") with respect to the IRS' claim for unpaid federal
withholding taxes. We reverse, in part, and remand for
further proceedings.
Background
Background
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A. Statutory Background
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By way of legal context, we begin with a brief
discussion of 26 U.S.C. 6672(a), which governs this
dispute, drawing primarily from our decision in Thomsen v.
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United States, 887 F.2d 12, 14 (1st Cir. 1989). The Internal
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Revenue Code ("the Code") requires employers to withhold
federal taxes from employees' wages, see 26 U.S.C. 3102,
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3402, and to hold such amounts in trust for the United
States. See 26 U.S.C. 7501. Once an employer has withheld
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the taxes, the IRS has no recourse against the employee in
the event of nonpayment. When an employer fails to remit the
withheld taxes, the IRS is not without recourse, for the Code
allows the IRS to look beyond the corporate form and hold
certain agents and officers of the corporation personally
liable for any taxes withheld but not paid. See 26 U.S.C.
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6672(a).
Title 26 U.S.C. 6672(a) provides that
[a]ny person required to collect,
truthfully account for, and pay over any
tax imposed by this title who willfully
fails to . . . pay over such tax . . .
shall, in addition to other penalties
provided by law, be liable to a penalty
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equal to the total amount of the tax
evaded, or not collected, or not
accounted for and paid over.
Section 6672(a) thus permits the IRS to recover the full
amount of delinquent withholding tax from any "responsible
person," i.e., one required to collect, account for and pay
over the taxes, if that individual acted willfully within the
meaning of the section. See Thomsen, 887 F.2d at 14.
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B. Factual Background
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We state the facts in the light most favorable to
Vinick, the party opposing summary judgment. See Hoeppner v.
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Crotched Mountain Rehabilitation Ctr., 31 F.3d 9, 14 (1st
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Cir. 1994).
Vinick is a certified public accountant and is
currently a partner in his own accounting firm. He has
practiced public accounting for over thirty years. Vinick
became acquainted with Richard Letterman, then a practicing
attorney, in the early 1970's. Around 1980 Letterman told
Vinick about the Jefferson Bronze Company ("Jefferson
Bronze"), a foundry in Salem, Massachusetts, and despite its
less than stellar financial performance, persuaded him that
it would make a good investment.
In 1981, Vinick, Letterman and Peter Mayer1 agreed
to purchase the assets of Jefferson Bronze. In the
transaction, each investor acquired one-third of the company,
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1. Peter Mayer is Letterman's brother-in-law.
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and pledged the equity in his house as part of the financing
package. Although the record is unclear as to how, Letterman
became president, Vinick had the title of treasurer, and
Mayer was given responsibility for the day-to-day management
of the foundry.
Vinick, a busy accountant, desired only to be a
passive investor in Jefferson Bronze. Despite his nominal
position as treasurer, Vinick neither saw the company bylaws
nor participated in any way in the fiscal or general
management of Jefferson Bronze. From 1981 to 1983, Mayer
oversaw the day to day operations of Jefferson Bronze, and
Vinick did nothing other than prepare the quarterly tax
returns.
By 1983, the company, under Mayer's stewardship,
was performing poorly and losing money. That poor
performance led to several changes in Jefferson Bronze's
structure. Mayer "was dismissed," and Vinick asked Ronald
Ouellette, a Jefferson Bronze employee, to assume oversight
of the day-to-day operations of the foundry. Vinick and
Letterman, in exchange for obtaining the release of Mayer's
house from the financing arrangement, acquired Mayer's
interest in Jefferson Bronze and each became a fifty percent
owner. As part of the restructuring, Vinick and Letterman
secured new financing in the amount of $300,000 which was
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used to pay off the original loan and for working capital,
once again pledging each of their houses as collateral.
Between 1983 and 1987, Ouellette continued to run
Jefferson Bronze and Vinick's involvement continued to
consist, with a few exceptions, of preparing the quarterly
tax returns. During 1985, Ouellette informed Vinick that
Jefferson Bronze had become delinquent in its withholding
taxes. Vinick informed Letterman of the problem and all
three shareholders agreed to attend a meeting with a revenue
officer to resolve the situation. Upon arrival, however,
Letterman and Ouellette refused to attend the meeting. They
waited outside in the car while Vinick alone met with the
revenue agent and negotiated a payment plan. "On rare
occasion" during this period, Vinick also reported Jefferson
Bronze's poor performance to Letterman and sought suggestions
for ways to improve the company's operations. At some point
between 1983 and 1987, apparently because of the continued
poor performance of the company, Letterman and Vinick
borrowed $35,000 from the former owner. That debt was
secured with personal guarantees.
In 1987, Letterman decided to assume oversight of
the daily operations of the foundry. Vinick continued to
prepare the quarterly tax returns. He and Letterman secured
an additional $300,000 of financing, this time by pledging
the assets of the company and their personal guarantees. As
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a condition of the loan, the lending bank required Jefferson
Bronze to transfer its checking account to the bank and
insisted that both Letterman and Vinick become signatories on
the account. Vinick, however, never exercised his check
signing authority nor did he have access to the corporate
checkbook. His involvement in the management of Jefferson
Bronze remained minimal.
After Letterman took over active management of the
company, Vinick spoke with either Letterman or his wife (who
served as bookkeeper) once every four to five weeks. On
occasion he would discuss "the problem of unpaid taxes" and
would urge the Lettermans to remit these taxes.
Specifically, each time he prepared a quarterly tax return he
discussed the withholding taxes with the Lettermans, learned
whether or not the taxes had been deposited, and if not,
urged the Lettermans to make the deposits. Each time he
raised the issue with the Lettermans, they promised to pay
the taxes, and Vinick relied on their assurances. Beginning
in April 1989, Jefferson Bronze again fell behind in its
withholding tax obligations.
In December 1990, the IRS made an assessment
against Vinick and Letterman, each in the amount of $49,129
for unpaid withholding taxes for the last three quarters of
1989 and the first two quarters of 1990. Vinick paid one
quarter's worth of the assessment, filed a claim for a
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refund, and upon IRS denial, brought a refund suit in
district court. The IRS counterclaimed for the balance of
the assessment and moved for summary judgment against both
Letterman and Vinick. The district court, concluding that
both Vinick and Letterman were responsible persons who acted
willfully under 6672(a), granted summary judgment for the
IRS. Vinick alone now appeals.2
Standard of Review
Standard of Review
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We review the award of summary judgment de novo.
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See Ortiz-Pinero v. Rivera-Arroyo, 84 F.3d 7, 11 (1st Cir.
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1996). Summary judgment is appropriate in the absence of a
genuine issue of material fact, when the moving party is
entitled to judgment as a matter of law. See Fed. R. Civ. P.
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56(c). A fact is material when it has the potential to
affect the outcome of the suit. See J. Geils Band Employee
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Benefit Plan v. Smith Barney Shearson, Inc., 76 F.3d 1245,
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1250-51 (1st Cir.), cert. denied, 117 S. Ct. 81 (1996).
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Neither party may rely on conclusory allegations or
unsubstantiated denials, but must identify specific facts
derived from the pleadings, depositions, answers to
interrogatories, admissions and affidavits to demonstrate
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2. The record reflects that in 1992, Letterman was disbarred
after he pled guilty to four counts of larceny and one count
of embezzlement by a fiduciary, charges all unrelated to
Jefferson Bronze. He received a two-year prison sentence.
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either the existence or absence of an issue of fact. See
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Fed. R. Civ. P. 56(c) and (e).
As in other tax litigation, the person challenging
an assessment under 6672(a) bears the burden of proving
that he is not a responsible person. See Caterino v. United
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States, 794 F.2d 1, 5 (1st Cir. 1986). Vinick thus bears the
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ultimate burden of proving that 6672(a) does not impose
liability on him for Jefferson Bronze's unpaid withholding
taxes. See id. At the summary judgment stage, however, the
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IRS, as the moving party, has the burden of demonstrating the
absence of a genuine issue of material fact as to whether
6672(a) applies and that it deserves judgment as a matter of
law. Vinick's burden, as the party opposing summary
judgment, remains the same as any opposing party: he must
demonstrate that disputed facts preclude summary judgment.
See O'Connor v. United States, 956 F.2d 48, 50 (4th Cir.
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1992).
Discussion
Discussion
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In granting summary judgment in favor of the IRS,
the district court determined both that Vinick was a
responsible person and that he acted willfully as a matter of
law. We consider each of these issues in turn.
A. Responsible under 6672(a)
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As we have noted, "[c]ourts have explicitly given
the word 'responsible' a broad interpretation." Caterino,
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794 F.2d at 5. Specifically, responsibility "is a matter of
status, duty, and authority," Thomsen, 887 F.2d at 16
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(internal quotations and citations omitted), aimed at the
ultimate determination of "whether the person had the power
to determine whether the taxes should be remitted or paid or
had 'the final word as to what bills should or should not be
paid and when,'" Caterino, 794 F.2d at 5 (quoting Adams v.
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United States, 504 F.2d 73, 75 (5th Cir. 1974)).
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We impose responsibility on "all with the
responsibility and authority to avoid the default,"
Harrington v. United States, 504 F.2d 1306, 1312 (1st Cir.
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1974), but predicate our definition of who is a responsible
person on the function of the employee in the business, and
not the level of the office held, see Caterino, 794 F.2d at
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5; see also O'Connor, 956 F.2d at 51 (indicating that
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6672(a) liability must derive from substance, not form). As
the Second Circuit recently stated, 6672(a) "is not meant
to ensnare those who have merely technical authority or
titular designation," but instead encompasses those close
enough to the business to prevent the default. United States
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v. Rem, 38 F.3d 634, 642 (2d Cir. 1994). At bottom, in order
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to be responsible, an individual must have had significant
control over the financial affairs of the company. See
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Caterino, 794 F.2d at 5; see also Rem, 38 F.3d at 642; United
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States v. Carrigan, 31 F.3d 130, 133 (3rd Cir. 1994). The
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individual assessed either must have exercised his authority
over financial affairs or general management, or must have
had a duty to do so. See O'Connor, 956 F.2d at 51.
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In the absence of uncontroverted evidence
establishing an individual's "precise responsibility" to pay
withholding taxes, see Barnett v. Internal Revenue Serv., 988
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F.2d 1449, 1455 (5th Cir. 1993), or of specific acts of
management or financial decision-making that would manifest
the level of control necessary for responsibility, various
indicia may establish responsibility under 6672(a). Such
indicia include the holding of corporate office, the
authority to disburse corporate funds, stock ownership, and
the ability to hire and fire employees. See Thomsen, 887
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F.2d at 16.
The IRS has offered no evidence suggesting that
Vinick had the actual responsibility to pay the withholding
taxes. Indeed, that was Letterman's duty. As to Vinick, the
IRS established some of the recognized indicia of
responsibility. During the quarters in controversy, Vinick
held the office of treasurer, prepared the quarterly returns,
spoke occasionally with the Lettermans about the business
(including the problem of unpaid taxes), had check signing
authority, and had pledged his personal assets and guarantee
in order to secure company financing. See Caterino, 794 F.2d
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at 5-6 (evaluating individual's responsibility during
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delinquent quarters); see also Barnett, 988 F.2d at 1455
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(same). From these indicia alone, one might infer that
Vinick was a responsible person.
The record in this case, however, permits a
competing inference. Vinick testified that from the outset
of their venture he made it clear to Letterman and Mayer that
his role was to be no more than that of a passive investor.
During the relevant quarters, Vinick neither hired nor fired
anyone, nor inserted himself into the company structure,
initiated change or made strategic decisions. Although he
technically possessed check writing authority, he never
possessed the checkbook, nor did he write any checks. While
Vinick did approach Ouellette to run the company when Mayer
was dismissed and negotiated a settlement with the IRS in
1985 for delinquent withholding taxes, neither of those
incidents occurred during the quarters in question.
Letterman, in his deposition, claimed that previous managers
had indicated that Vinick had more than minimal involvement
in management. Letterman admitted, however, that after he
took over Vinick's involvement was minimal.3
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3. Vinick's situation resembles that of the plaintiff in the
Fourth Circuit case O'Connor v. United States, 956 F.2d 48
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(4th Cir. 1991). In O'Connor, the Fourth Circuit reversed
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the award of summary judgment for the IRS against a corporate
vice president who, like Vinick, averred that the record did
not establish his responsibility as a matter of law. See id.
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at 52. The district court granted summary judgment on the
basis that O'Connor demonstrated many of the indicia of a
responsible person: he was a founder, fifty percent owner,
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In short, while the record in this case may contain
sufficient evidence from which one could infer Vinick's
responsibility as a matter of fact, "[t]he sufficiency of the
government's evidence was not the proper test on a motion for
summary judgment." Rem, 38 F.3d at 645. In reversing the
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district court on this issue we by no means absolve Vinick or
in any way pass on whether he is or is not responsible under
6672(a).4 We simply conclude that on the basis of the
evidence before us, a reasonable jury could find that Vinick
was not a responsible person.
C. Willfulness under 6672(a)
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Assuming a jury finds Vinick a responsible person
under 6672(a), a predicate to the question of willfulness,
we affirm the district court's conclusion that the undisputed
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officer and director of the company; he had the authority to
sign checks; he had a general familiarity with the financial
affairs of the company. See O'Connor v. United States, 1991
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WL 64479, at *4 (D. Md.). In reversing, the Fourth Circuit
concluded that the absence of evidence suggesting that
O'Connor either exercised any authority over financial
affairs or general management, or was under a duty to do so,
precluded the entry of summary judgment and left for trial
the issue of O'Connor's actual level of involvement in the
company. Id. at 50-52.
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4. Unlike Thomsen, where we affirmed the district court's
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grant of a judgment as a matter of law for the IRS, this case
presents a very different factual scenario. In Thomsen, in
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addition to various indicia of responsibility, we identified
"concrete indications of Thomsen's actual authority." 887
F.2d at 16-17. Thomsen affirmatively made the decision to
close the business and took possession of the corporate
books, records and remaining inventory. See id. at 17.
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facts establish that Vinick acted willfully as a matter of
law.
Section 6672(a) contemplates a civil penalty the
purpose of which is to protect governmental revenue. See
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Thomsen, 887 F.2d at 17. Willfulness under 6672(a),
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therefore, does not depend on the presence of either criminal
motive or the specific intent to defraud the government. See
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id. Instead, an individual who acts with a "reckless
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disregard" of a known or obvious risk of nonpayment acts
willfully. See id. at 18. We have recognized three factual
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scenarios that meet this standard: (1) reliance upon the
statements of a person in control of the finances when the
circumstances show that the responsible person knew the
person to be unreliable; (2) failure to investigate or to
correct mismanagement after having notice of nonpayment of
withholding taxes; and (3) knowing that the business is in
financial trouble and continuing to pay other creditors
without making reasonable inquiry as to the status of the
withholding taxes. See id. at 18-19 (internal quotations and
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citations omitted). With respect to the first scenario,
a responsible person acts with reckless disregard when he
"had knowledge that the other individual had in the past
failed to perform adequately with regard to the financial
affairs of the taxpayer entity." Id. at 18 (internal
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quotation and citation omitted).
Once a 'responsible person' has had clear
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notice that the person to whom he has
delegated responsibility for paying the
taxes has wrongfully failed to pay them
in the past, he continues to delegate
that responsibility at his own peril.
Should the "responsible person" continue
to delegate, without taking appropriate
measures to assure that the delegated
person will not repeat the dereliction in
the future, the subsequent willfulness of
the delegatee in once more failing to pay
the taxes will be imputed to the
"responsible person."
Id. at 19.
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The undisputed facts establish that as early as
1985 Vinick knew of Letterman's unreliability with respect to
the withholding taxes. Vinick admitted that Letterman
refused to accompany him to a meeting with a revenue agent
after the first delinquency. Letterman and Ouellette waited
in the car while Vinick negotiated a payment plan.
Vinick also admitted that after Letterman took over
day-to-day management of Jefferson Bronze, he had discussions
with either Letterman or Letterman's wife whenever he
prepared a quarterly return. On those occasions, Vinick
urged the Lettermans to pay the taxes and they promised they
would. Vinick asserted that while he had knowledge of the
unpaid taxes, his absolute lack of any control over the
disbursement of funds rendered that knowledge meaningless.
While such knowledge may not bear on Vinick's
6672(a) responsibility, should a jury find him responsible,
it relates directly to a proper evaluation of whether he
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acted willfully. Vinick concedes that he knew of Letterman's
delinquency. Yet Vinick relied on Letterman's promises of
future payment without further investigation even though he
realized that the delinquency continued.5 Thus, should
Vinick be found to be a responsible party, the willfulness
prong has been met.
Conclusion
Conclusion
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We reverse the district court's determination that
Vinick was a responsible person as a matter of law, but
affirm the court's conclusion that Vinick acted willfully.
We remand this case to the district court for further
proceedings on the issue of responsibility, and note that
should a jury find Vinick responsible, he acted willfully as
a matter of law.
Affirmed in part, reversed in part and remanded.
Affirmed in part, reversed in part and remanded.
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5. Although Vinick made no arguments, either in his brief or
at oral argument, specific to willfulness separate from
responsibility, he could argue that he did not act willfully
at least during the first quarter in which Jefferson Bronze
went delinquent. The previous events, such as Letterman's
1985 refusal to meet with a revenue agent and Vinick's
knowledge that Letterman, on occasion, subsequently failed to
pay, necessarily gave Vinick the "knowledge that [Letterman]
had in the past failed to perform adequately with regard to
the financial affairs" of Jefferson Bronze. Thomsen, 887
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F.2d at 18.
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