OPINION
This case is before the court following a trial held in Dallas, Texas. At issue is whether plaintiff is liable for a so-called “responsible officer” penalty imposed upon him
I. STATEMENT OF FACTS
On June 28,1982, David F. Cook (plaintiff) and three other investors formed National Metal Finishing, Inc. (NMFI), a Texas corporation specializing in the manufacture of aircraft wings. NMFI’s manufacturing operations occurred at two sites. The company formed aircraft wings at a plant in Weather-ford, Texas and tested and treated wings for fatigue and resistance at a plant in Dallas, Texas. For most of NMFI’s lifespan, its administrative offices were located in downtown Dallas, independent of its manufacturing sites.
Throughout NMFI’s existence, Mr. Cook served as its controlling shareholder and president, as well as a member of its board of directors. Mr. Cook contributed the original start-up capital to found NMFI and owned 37 percent of the company from the time of its inception through 1987. In 1987, Edward Rose bought out three of the original shareholders, taking a 45 percent ownership share in the corporation and leaving Mr. Cook with a controlling portion of 55 percent of the stock.
An experienced aerospace engineer, Mr. Cook was determined to make NMFI a success. He oversaw most of NMFI’s operations, dividing his efforts between the company’s manufacturing sites and administrative offices. In his capacity as president, Mr. Cook signed leases, promissory notes and workers’ compensation agreements on behalf of NMFI. He also had signature authority over NMFI’s checking account
The beginning of the end for NMFI occurred in 1988 when the City of Dallas and the State of Texas raised environmental concerns regarding the company’s procedures for disposing of chemicals used at its Dallas site. NMFI’s access to city sewer lines was temporarily disconnected on multiple occasions, the first time in 1988. The cost of remedying these environmental problems was estimated to be between $200,000 and $300,000. This additional expense threatened to overwhelm the company’s already strapped resources.
In March of 1989, Mr. Cook consulted bankruptcy counsel on behalf of NMFI. On April 26, 1989, Mr. Cook pleaded no contest to misdemeanor charges of violating state environmental laws. He was placed on probation for six months, with the understanding that further violations by NMFI would result in his being personally liable for a fine of $1,000, plus court costs. On May 11,1989, NMFI, though still solvent, filed a petition for reorganization under Chapter 11 of the Bankruptcy Code.
On June 13, 1989, the bankruptcy court issued an Order Granting Adequate Protection of a secured creditor, which allowed NMFI to function as a debtor in possession, while setting parameters on how the business would be run. Under this order, NMFI was prohibited from operating its Dallas facility and from utilizing more than $25,500 of its
On August 10, 1990, an Order Confirming NMFI’s Amended Plan of Reorganization and Modification was filed. Pursuant to the confirmed reorganization plan, NMFI ceased operation in December 1990 upon the sale of its assets. The $700,000 generated by the sale of assets was used exclusively to repay fully NMFI’s debt with Bridge Bank.
Immediately prior to filing its petition for bankruptcy and throughout most of the time that its reorganization was pending, NMFI failed to pay federal employment taxes due on the wages its employees received. Specifically, NMFI failed to make any payments for the first and fourth quarters of 1989 and all four quarters of 1990 in the following amounts: Additionally, NMFI incurred interest and penalties of $1,164 for late payment of its payroll taxes for the third quarter of 1989.
QUARTER PAYROLL TAX
1st Quarter, 1989_$30,952.94_
4th Quarter, 1989 $21,433.09
1st Quarter, 1990 $26,133.53
2nd Quarter, 1990 $27,957.01
3rd Quarter, 1990 $21,591.40
4th Quarter, 1990 $ 8,182.20
Despite not paying over the payroll taxes it owed, NMFI eventually filed the requisite returns for each of the quarters in question. The company had a standard procedure for preparing the returns, which were due one month after the end of each quarter. Judy Combs, NMFI’s bookkeeper, would accumulate the relevant data through a specialized computer program and then use it to complete a copy of Internal Revenue Service (IRS) Form 941 “Employer’s Quarterly Federal Tax Return.” Ms. Combs dated the forms as she prepared them and gave them to Mr. Cook to sign as president of the company. After signing the forms, Mr. Cook would return them to Ms. Combs for transmittal to the IRS. Mr. Cook signed the Forms 941 for all of the periods at issue; indeed, no one other than Mr. Cook ever signed Forms 941 on behalf of NMFI.
However, there are indications that the corporation deviated from its standard business routine in preparing the returns for the quarters at issue here. With the exception of the return for the first quarter of 1989, all of the relevant returns were filed late. NMFI’s return for the fourth quarter of 1989, due January 31, 1990, was prepared January 30, 1990, but not filed with the IRS until June 11, 1990. Its return for the first two quarters of 1990, due April 30 and July 31 respectively, were received by the IRS on November 30, 1990. Likewise, the IRS received NMFI’s return for the third quarter of 1990, due October 31, on December 20, 1990. NMFI’s return for the fourth quarter of 1990, due January 31, 1991, was received by the IRS on February 13, 1991. Additionally, the dates on the returns for the first two quarters of 1990 appear to have been altered prior to filing. On all six returns, the lines indicating the amount deposited for the quarter were left blank. At trial, Ms. Combs testified that she had prepared these returns
The bankruptcy court never directly addressed the issue of NMFI’s overdue employment taxes and, despite Mr. Cook’s assertions to the contrary, it appears that the court was never fully apprised of NMFI’s payroll tax difficulties. NMFI’s statement of pre-petition liabilities, signed by Mr. Cook on May 26, 1989, included $37,748.04 in taxes owed to the federal government, of which $30, 952.94 could be accounted for as overdue withholding taxes and related penalties. However, despite having taken no steps to reduce or eliminate its debt to the IRS, the comparative balance sheets NMFI periodically submitted to the bankruptcy court omitted all reference to payroll tax liabilities; notably, the entire “Taxes Payable” section of these forms, including a line for “Federal Payroll Taxes,” was consistently left blank. Moreover, although broad references to tax obligations were made at different points during the bankruptcy proceedings, none of the court’s intermediate orders ever discussed this matter. Mr. Cook admitted that the bankruptcy judge never explicitly prohibited him from paying NMFI’s steadily accruing employment taxes and that he never sought the judge’s guidance on the matter. In contrast, the bankruptcy judge did specifically forbid NMFI from paying rent on its Dallas facility
Throughout the time NMFI’s employment tax bill was accumulating, Mr. Cook signed checks to pay the company’s trade creditors, utilities, environmental cleanup costs and rent on its Weatherford plant. He also signed NMFI’s payroll checks and authorized his wife to receive a 1990 salary of $19,500, even though she provided no direct services to the company. Mr. Cook testified that, for most of 1989 and 1990, NMFI had insufficient funds to allocate the appropriate amounts to a government trust fund account for payment of its employment taxes. He indicated that NMFI had not diverted withheld tax money to other uses; it had never had the money to withhold in the first place, effectively paying its employees “net wages.”
According to Mr. Cook, his understanding of the judge’s top priority during and after the reorganization period was operation of the company to enable cleanup of the environmental difficulties at the Dallas plant. To this end, between 1989 and 1990, he contributed approximately $80,131.51 of his own money to meet NMFI’s environmental cleanup expenses. Mr. Cook also paid some of the Dallas cleanup costs with funds generated by National Shot Peening, Inc., the small aerospace company that he founded ' after the demise of NMFI. In addition to paying NMFI’s environmental expenses, between May 1989 and May 1990, Mr. Cook used approximately $10,000 of his private funds to pay some of NMFI’s business related costs such as lawyer’s fees and travel expenses.
On June 8, 1992, the IRS assessed against Mr. Cook a penalty of $97,760.00 pursuant to section 6672(a) of the Code, for failure to pay over withheld employment taxes. On September 8, 1997, plaintiff paid $100.00 of the penalty and filed a claim for refund. When this claim was neither accepted nor rejected, plaintiff filed suit in this court on June 18, 1998. See 26 U.S.C. § 6532(a)(1). In his complaint, plaintiff asserted that he was neither a “responsible person” nor “willful” in NMFI’s failure to pay over the employment taxes, primarily because any payments made by the company at that time were made at the direction of the bankruptcy court overseeing NMFI’s dissolution. Defendant answered and counterclaimed on November 18, 1998, demanding payment of the entire sec
Subsequently, in the course of discovery, it was determined that plaintiffs IRS administrative file had been lost.
Thus, in order to determine whether the presumption of correctness attaches to the assessment in question and to fix the burden of proof on the counterclaim, the defendant, rather than the plaintiff, shall present its evidence first (with appropriate cross-examination). The court will then rule as to whether the government’s evidence provides the necessary foundation for the assessment. Following that ruling, the plaintiff, who retains the burden of proof on his complaint in this case, shall present his case in chief, with normal trial procedures regarding the order of proof to be followed thereafter.
Id. at 119. Pursuant to this ruling, the court conducted a pre-trial hearing on June 11, 2001, based upon which, the court found that defendant had produced sufficient evidence for the presumption of correctness to attach to the IRS’s assessment. Trial on the merits thus proceeded with the standard presumptions and burdens regarding the conduct of a tax refund suit in place.
II. DISCUSSION
Every employer is required to deduct and withhold federal income tax and Federal Insurance Contributions Act (FICA) tax from employees’ wages as and when they are paid. See 26 U.S.C. §§ 3102 (FICA) and 3402(a) (income tax). Under section 7501 of the Internal Revenue Code, such amounts are held in trust for the United States and thus are commonly referred to as trust fund taxes. See Slodov v. United States,
To protect against such losses, the persons responsible for ensuring that the trust fund taxes are paid, who willfully fail to do so, may be held personally liable under section 6672 of the Internal Revenue Code. See 26 U.S.C. § 6672; see also United States v. Bisbee,
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.
26 U.S.C. § 6672(a). According to its terms, then, liability under section 6672 results from the confluence of three factors: “(1) There must be a ‘person’ who (2) is required to collect, truthfully account for and pay over taxes, but who (3) ‘willfully’ fails to do so.” Emshwiller,
The first two requirements identified above are typically collapsed into the single concept of a “responsible person,” while the willfulness criteria demands separate attention. Both the responsible person analysis and the assessment of willfulness are fact-based determinations unique to the circumstances of each individual case. See Feist v. United States,
A. Responsible Person
According to section 6671(b) of the Code, the term “person,” as used in section 6672, “includes an officer or employee of a corporation ... who as such officer, employee or member, is under a duty to perform the act in respect of which the violation occurs.” This definition of “person” is meant to protect the government fisc by facilitating the collection of taxes from those who have both the responsibility and authority to avoid the default. See White v. United States,
The record evidence reveals that Mr. Cook meets virtually every indicia of being a responsible person under section 6672(a). He was not only the founder and president of NMFI as well as a member of its board of directors, but also the controlling shareholder during all the quarters at issue and throughout most of the company’s existence. He had the authority to sign checks and tax returns on behalf of the corporation and exercised that authority regularly. Although he alluded to delegating limited financial decision-making and check-signing authority to Ms. Combs, Mr. Cook testified that “the buck stop[ped] with me.” Cf. Teets v. United States,
B. Willfulness
Even a responsible person is not liable for a penalty under section 6672(a) unless his or her failure to collect, account for, or remit withholding taxes was willful. Godfrey,
Limning the appropriate standards to be applied herein, the Federal Circuit has held that willfulness may be shown in at least two ways: (i) “a deliberate choice voluntarily, consciously and intentionally made to pay other creditors instead of paying the [government” or (ii) “reckless disregard of a known or obvious risk that the taxes may not be remitted to the government.” Godfrey,
In arguing that he did not act willfully, plaintiff does not contend — nor, in good faith, could he — that he had no knowledge of NMFI’s obligation to remit withholding taxes. In fact, beginning in April 1989, and throughout the period in question, he signed IRS Forms 941 plainly indicating that NMFI was not meeting its withholding tax responsibilities. Nor does plaintiff assert that he lacked knowledge that NMFI’s funds, including the withheld taxes, were being used to pay creditors other than the IRS. To the contrary, he not only authorized those payments, but also paid net wages to his employees fully knowing that amounts corresponding to the taxes that should have been withheld from those employees would not be paid over to the United States. Nonetheless, plaintiff claims that his actions were not willful because the bankruptcy court compelled him to use the company’s available funds, first, for environmental clean up and, then, for the other expenses of operating the business. Even if this were not actually the case, he asserts that he subjectively believed it to be so at the time that he failed to remit the withholding taxes in question. Accordingly, he contends that he did not make a conscious, voluntary choice to pay other creditors instead of the United States and, as such, acted without personal fault.
With some prompting from the court, the parties, in briefing these contentions, have framed the debate here as requiring the court to decide whether willfulness is determined from an objective versus subjective standpoint. Plaintiff clearly emphasizes the latter perspective, which obviously favors his contentions, while defendant, albeit more indirectly and in muted terms, clearly analyzes the evidence more from an objective focus. In many ways, however, the objeetive/subjective debate is a false dichotomy, particularly on the facts of this case. To be sure, the decisions in the circuits run the gamut in defining wilfulness, with some formulations more explicitly relying on subjective terms than others.
Willfulness can be proved by showing that the responsible person recklessly disregarded his duty to collect, account for, and pay over the trust fund taxes or by showing that the responsible person ignored an obvious and known risk that the trust funds might not be remitted. The concomitant of this rule must be that absence of willfulness can be proved by an affirmative showing that the responsible person did not disregard his duties, and that he undertook all reasonable efforts to see that such taxes would in fact be paid, in circumstances where the employer had the means of payment and could reasonably be expected to make the payment.
Feist,
Plaintiffs flagship claim is that the bankruptcy judge’s emphasis on cleaning up NMFI’s environmental problems “effectively” compelled him not to pay any other expenses including the company’s trust fund tax obligations. “Effectively” is the loaded word in the prior sentence, as the bankruptcy court never explicitly ordered plaintiff or NMFI to disregard the company’s withholding tax obligations.
On these facts alone, which are solidly anchored to the record, Mr. Cook’s actions here manifestly were willful. Cf. Sorenson,
The foregoing, however, considerably overstates plaintiffs case. On the whole, this court believes that it is far more likely than not that plaintiff did not even subjectively believe that the bankruptcy court had precluded the payments. Various evidence fortifies this conclusion. First, there are the
A like use of blinders underlies plaintiffs fall-back position — that the bankruptcy court left no unencumbered funds from which he could pay the outstanding taxes. To be sure, some courts have held that if an individual becomes a responsible officer after a withholding tax accrues, that person is not willful if all the available funds to pay the tax are encumbered. See, e.g., Slodov,
Rather than paying net wages, Mr. Cook’s duty in this situation was “to prorate such funds as [were] available between the Government and the employees.” Sorenson,
III. CONCLUSION
That ends this matter. Plaintiff is correct in asserting that the penalty structure imposed by section 6672(a) is relatively rigid and unyielding; Congress intended it to be so to discourage officials of floundering companies from being tempted to use withheld taxes to stave off creditors. Here, Mr. Cook readily succumbed to that temptation, thereby triggering the penalty provision — “[i]f a man intentionally adopts certain conduct in certain circumstances known to him, and that conduct is forbidden by the law under those circumstances, he intentionally breaks the law in the only sense in which the law ever considers intent.” Ellis v. United States,
Notes
. The record does not disclose how plaintiff began with 37 percent of the stock and, after this transaction, ended up with 55 percent.
. NMFI’s bookkeeper and Mr. Cook’s then-wife were also authorized to sign checks on the company’s behalf, but the evidence indicates that these duties were purely ministerial and that no one but Mr. Cook decided whom to pay or what checks to write.
. NMFI paid its third quarter payroll taxes on November 27, 1989, approximately one month overdue. Although NMFI paid its original obligation for that quarter in full, it never paid the interest and penalties assessed for the late payment.
. The partnership that owned the Dallas property included Mr. Cook and other initial investors in NMFI, therefore the judge deemed them internal creditors not independent entities entitled to payment during bankruptcy.
. In his response to plaintiff’s Motion to Compel, defendant's counsel stated:
Counsel for defendant is not currently in possession of the IRS Administrative File and after an exhaustive search and communications with the various IRS and Department of Justice employees who may have had possession of the Administrative File, counsel for defendant believes the IRS Administrative File relating to plaintiff to be lost.
. In a plain vanilla refund suit, the assessment made by the Service is presumed to be correct and this places an obligation on the taxpayer to come forward with evidence to rebut a presumption of correctness. United States v. Janis,
. Adopting these factors and a few others, other courts have essentially applied a seven-factor approach to determining whether one is a responsible person, including:
whether the person: (1) is an officer or member of the board of directors, (2) owns shares or possesses an entrepreneurial stake in the company, (3) is active in the management of day-to-day affairs of the company, (4) has the ability to hire and fire employees, (5) makes decisions regarding which, when and in what order outstanding debts or taxes will be paid, (6) exercises control over daily bank accounts and disbursement records, and (7) has check-signing authority.
Fiataruolo v. United States,
. For cases that apply more subjective language see Sawyer v. United States,
. Similarly, the Second Circuit has recognized that “a responsible person’s failure to cause the withholding taxes to be paid is not willful if he [or she] believed that the taxes were in fact being paid, so long as that belief was, in the circumstances, a reasonable one.” United States v. Rem,
. Thus, for example, Mr. Cook testified:
Q: Let me just restate the question then. So it is your testimony' — •
A: Yes.
Q: —that the bankruptcy judge ordered National Metal not to comply with the applicable Internal Revenue laws and continue to pay the payroll taxes when they were due.
A: That was not your original question, sir, and—
Q: That is my question now.
A: Okay, if that’s your question, I will say no. And, Dean Fuller, one of NMFI’s lawyers, stated that “I don’t recall specifically what the Court wanted done. I recall the Court placing an emphasis on the environmental issues, because they were a big issue in the case. I don’t recall a specific order one way or the other, instructing one to be paid over the other or otherwise, not specifically.” In a similar vein, Ms. Edmonson, Cook’s former wife, indicated that the withholding taxes were "never discussed” with the bankruptcy court.
Arguably, the bankruptcy judge could not lawfully have made such an order had the IRS been able to establish a sufficient nexus between the trust funds owing and property in the possession of the company. See Begier v. Internal Rev. Serv.,496 U.S. 53 , 55,110 S.Ct. 2258 ,110 L.Ed.2d 46 (1990) (establishing that pre-petition payments of trust fund taxes cannot be avoided as preferences because § 7501 creates a trust held for the benefit of the IRS the corpus of which is not part of the property of the debtor nor the property of the estate). The court, of course, need not reach this issue.
. Regarding this point, Mr. Fuller testified:
Q: In terms of how you would be pursuing a bankruptcy matter at that time, would you have ever, for example, recommended to a client that they take money that they’ve withheld from employees and pay another creditor with it?
A: As a lawyer, I certainly wouldn’t do that without having some' instruction or the judge okaying that procedure?
Q: And why would you not have instructed a client to do that?
A: Well, because obviously the 941s are important to be paid. Withholding taxes are essential to be paid, and the Government’s entitled to their money and that somebody could be individually liable as well, is my understanding, and I wouldn’t want that circumstance to occur. And if that money is for purposes of taking care of the taxes on the payroll for the Government, then I certainly wouldn’t typically tell a debtor-in-possession to use those funds without court authorization to do so.
Q: And when you say, typically, is it your understanding that was your sense of the law back in 1989 and 1990 as well?
A: Yes, I would say that.
Mr. Fuller later indicated, in reference to a typical bankruptcy, that “the Court certainly wants to see that your post-petition obligations are being paid.”
. The court rejects Mr. Cook's testimony on this point based not only on the contradictory evidence in the record, but also because, at trial, he gave evasive answers and, at a minimum, tended to shade the unvarnished truth. For example, in cross-examination, he first asserted that the bankruptcy judge had "in so many words alluded to the fact" that the payroll taxes would be paid later, indicating that the matter was discussed not in the courtroom, but in a “sideroom.” As his cross-examination proceeded, he maintained this view even when read his deposition testimony — there, he had indicated that the payroll tax "was not an issue that was discussed” — rejecting that testimony and stating instead that he wanted to "amend my answer.” Ultimately, however, as discussed above, he abandoned that position. Indeed, when the court, at the conclusion of his testimony, point-blank asked "Did Judge Abram-son ever explicitly — so I’m not talkfing] about genetically or categorically or by some indirect reference, but ever explicitly discuss with you the employment taxes that were unpaid for 1989 and 1990,” he answered "no.” Mr. Cook gave similarly shifting testimony regarding his lawyer’s advice, at some points suggesting that he had repeatedly sought advice from his attorneys but not received it; at others, testifying that his attorneys had told him not to pay these taxes; and at one point testifying, seemingly contrariwise, that "it was our attorney’s opinion that the cash collateral received by the bank was sufficient to pay your [sic] payroll taxes.”
. As indicated, as early.as June 2, 1989, and no later than June 27, 1989, the only legal obligation imposed on NMFI’s funds was the order
. See also Hochstein,