Shore v. Brown, No. 1:2007cv01160 - Document 97 (E.D. Cal. 2009)
Court Description: MEMORANDUM DECISION re 52 Defendant United States of America's Motion for Summary Judgment Against Additional Counterclaim Defendants Gregory Shore and Brenda Reynolds, signed by Judge Oliver W. Wanger on 10/9/09. (Verduzco, M)
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1 2 3 UNITED STATES DISTRICT COURT 4 EASTERN DISTRICT OF CALIFORNIA 5 6 7 WILMA SHORE, 8 1:07-CV-01160 OWW SMS Plaintiff, MEMORANDUM DECISION RE DEFENDANT UNITED STATES OF AMERICA S MOTION FOR SUMMARY JUDGMENT AGAINST ADDITIONAL COUNTERCLAIM DEFENDANTS GREGORY SHORE AND BRENDA REYNOLDS (Doc. 52.) 9 v. 10 11 12 13 KEVIN M. BROWN, ACTING COMMISSIONER OF INTERNAL REVENUE SERVICE OF UNITED STATES OF AMERICA, and DOES 1 through 10 inclusive 14 Defendant. 15 16 UNITED STATES OF AMERICA, Counterclaimant, 17 v. 18 19 WILMA SHORE, Counterclaim Defendant. 20 21 22 AND GREGORY SHORE and BRENDA O. REYNOLDS 23 Additional Counterclaim Defendants. 24 25 26 /// 27 /// 28 /// 1 I. INTRODUCTION. 1 2 Before the court for decision is the United States Motion For 3 Summary Judgment to reduce to judgment the outstanding federal 4 income tax liabilities assessed against Counterclaim-Defendants 5 Gregory Shore and Brenda Reynolds. 6 unopposed.1 (Doc. 52.) The motion is 7 II. FACTUAL BACKGROUND. 8 9 This case arises out of tax liabilities assessed by the 10 Internal Revenue Service ( IRS ) against Gregory Shore and Brenda 11 Reynolds because it deemed them to be responsible persons for three 12 separate corporations, Dean s Materials, Inc., Dean R. Shore, Inc., 13 and Cybergate, Inc. The government seeks to collect unpaid payroll 14 taxes from Dean s Materials, Inc. and Dean R. Shore, Inc., for 15 eleven tax periods from April 1, 1997 through December 31, 1999. 16 The government seeks recovery of payroll taxes from Cybergate.com, 17 Inc., for seven tax periods from March 31, 1998 through September 18 30, 1999. 19 CMS and INCON evolved out of a small acoustical tile business 20 started by Dean R. Shore, Gregory Shore s deceased father, in 1960. 21 (Defendant United States Statement of Disputed Facts ( DSUF ) 1.) 22 Dean s Materials, Inc. sold building supplies in Central California 23 under the trade name Construction Materials Suppliers ( CMS ). 24 (DSUF 3.) Dean R. Shore, Inc. was a large commercial acoustical 25 1 26 27 28 The United States requested the Clerk to enter default against Gregory Shore and Brenda Reynolds on June 23, 2008. (Docs. 20 & 21.) The Clerk entered default against both parties on June 24, 2008. (Docs. 24 & 25.) To date, neither Gregory Shore nor Brenda Reynolds have moved to set aside the default. 2 1 tile, plaster and commercial drywall subcontractor that did 2 business under the name Interior Contractors ( INCON ). 3 Throughout the relevant tax periods at issue in this case, CMS was 4 the parent company and sole shareholder of INCON.2 (DSUF 4.) (DSUF 7.) 5 During the relevant tax periods at issue in this litigation, 6 Gregory Shore and Brenda Reynolds were employees of CMS and INCON. 7 (DSUF 14, 56.) 8 and INCON, as well as serving as a director and officer for each 9 company. Gregory shore managed the daily operations of CMS (DSUF 9, 14, 56, 69, 72-74.) Brenda Reynolds was the 10 controller for both companies, managing financial operations and 11 the accounts payable. 12 Shore and Reynolds signed checks, controlled employees (i.e., 13 ability to hire and fire), knew of CMS and INCON s poor financial 14 condition as early as 1997, and paid other creditors with full 15 knowledge of the federal tax indebtedness.3 16 was on this basis that the IRS assessed penalties against Gregory 17 Shore and Brenda Reynolds. (DSUF 56-58.) It is undisputed that both (DSUF 14, 56-82.) It (DSUF 117-19.) 18 Gregory Shore acquired Cybergate in the mid-1990's and, during 19 the relevant tax periods, was its majority owner, President, and 20 21 22 2 Other than the interests of Gregory Shore and Brenda Reynolds, Cybergate was not directly affiliated to either CMS or INCON. 23 3 24 25 26 27 28 There is also evidence that Mrs. Reynolds deposited $30,000 of her personal funds into INCON s payroll accounts to cover payroll checks. (DSUF 68.) In her January 22, 2009 deposition, Mrs. Reynolds admitted making the deposits because [a]ll I know is one day I went to the bank and there was like 18 guys waiting for their paychecks, and there was no money in the payroll account. (Dep. Reynolds, 70:21-70:24.) According to Mrs. Reynolds, Mr. Shore knew that she deposited personal funds into company accounts (Dep. Reynolds, 71:4-71:6.) 3 1 Director. (DSUF 74.) Mrs. Reynolds was Cybergate s Secretary and 2 Treasurer, as well as serving on its Board of Directors. 3 69.) Pursuant to their corporate positions, Shore and Reynolds had 4 significant 5 including 6 negotiating contracts. 7 Shore and Reynolds knew Cybergate was in poor financial condition 8 as early as 1997, yet continued paying creditors other than the IRS 9 during the relevant time period in this case. control signing over checks, Cybergate s hiring financial and firing (DSUF 69-71, 75.) (DSUF operations, employees, and It is undisputed that (Id.) 10 Following an investigation into the delinquent taxes, the IRS 11 assessed trust fund recovery penalties against Gregory Shore and 12 Brenda Reynolds relating to CMS, INCON, and Cybergate s outstanding 13 payroll liabilities. (DSUF 117-19.) 14 15 A. Assessments Against Gregory Shore 16 The IRS assessed penalties against Gregory Shore as to CMS and 17 INCON s unpaid tax liabilities for eleven tax periods from April 1, 18 1997 through December 31, 1999. 19 penalties against Gregory Shore as to Cybergate.com s unpaid tax 20 liabilities for seven tax periods from March 31, 1998 through 21 September 30, 1999. (DSUF 117-18.) The IRS assessed (Id.) 22 The IRS assessed penalties against Gregory Shore concerning 23 CMS unpaid tax liabilities in the amount of $38,867.58 for the 24 second quarter of 1997, $36,346.66 for the third quarter of 1997, 25 $39,647.46 for the fourth quarter of 1997, $25,287.07 for the first 26 quarter 27 $26,193.58 for the third quarter of 1998, $23,540.84 for the fourth 28 quarter of of 1998, 1998, $25,665.25 $17,642.23 for for 4 the the second first quarter quarter of of 1998, 1999, 1 $18,670.89 for the second quarter of 1999, $18,519.88 for the third 2 quarter of 1999, and $19,336.95 for the fourth quarter of 1999.4 3 (DSUF 118.) 4 Concerning INCON, the IRS assessed penalties against Gregory 5 Shore in the amount of $106,345.58 for the second quarter of 1997, 6 $155,671.18 for the third quarter of 1997, $124,821.18 for the 7 fourth quarter of 1997, $218,437.67 for the first quarter of 1998, 8 $144,667.76 for the second quarter of 1998, $91,513.87 for the 9 third quarter of 1998, $183,554.25 for the fourth quarter of 1998, 10 $171,853.43 for the first quarter of 1999, $217,007.41 for the 11 second quarter of 1999, $143,344.31 for the third quarter of 1999, 12 and $122,304.55 for the fourth quarter of 1999. (DSUF 118.) 13 The IRS assessed trust fund recovery penalties against Gregory 14 Shore relating to Cybergate s outstanding payroll liabilities for 15 seven tax periods running from April 1, 1997 through December 31, 16 1999. 17 the amount of $4,861.38 for the first quarter of 1998, $5,178.26 18 for the second quarter of 1998, $4,619.19 for the third quarter of 19 1998, $4,523.20 for the fourth quarter of 1998, $4,625.13 for the 20 first quarter of 1998, $5,723.50 for the second quarter of 1998, 21 and $5,836.08 for the third quarter of 1998. 22 (DSUF 118.) The IRS assessed penalties against Mr. Shore in (DSUF 118.) As of July 19, 2009, the total assessed penalties against 23 Brenda Reynolds for CMS, INCON, and Cybergate s federal tax 24 liabilities for all tax periods at issue, including interest, is 25 4 26 27 28 The assessed penalties against Mrs. Reynolds concerning CMS and INCON span only eight tax periods, from March 31, 1998 through December 31, 1999. The assessed penalties against Gregory Shore concerning CMS and INCON for eleven tax periods from April 1, 1997 through December 31, 1999. 5 1 $3,160,230.95. (DSUF 118.) 2 3 B. Assessments Against Brenda Reynolds 4 The IRS assessed penalties against Brenda Reynolds as to CMS 5 and INCON s unpaid tax liabilities for eight tax periods, from 6 March 31, 1998 through December 31, 1999. 7 assessed penalties against Brenda Reynolds as to Cybergate.com s 8 unpaid tax liabilities for seven tax periods from March 31, 1998 9 through September 30, 1999. (DSUF 119.) The IRS (Id.) 10 The IRS assessed penalties against Brenda Reynolds concerning 11 CMS unpaid tax liabilities in the amount of $25,287.07 for the 12 first quarter of 1998, $25,665.25 for the second quarter of 1998, 13 $26,193.58 for the third quarter of 1998, $23,540.84 for the fourth 14 quarter 15 $18,670.89 for the second quarter of 1999, $18,519.88 for the third 16 quarter of 1999, and $19,336.95 for the fourth quarter of 1999.5 17 (DSUF 119.) of 1998, $17,642.23 for the first quarter of 1999, 18 Concerning INCON, the IRS assessed penalties against Brenda 19 Reynolds in the amount of $218,437.67 for the first quarter of 20 1998, $144,667.76 for the second quarter of 1998, $91,513.87 for 21 the third quarter of 1998, $183,554.25 for the fourth quarter of 22 1998, $171,853.43 for the first quarter of 1999, $217,007.41 for 23 the second quarter of 1999, $143,344.31 for the third quarter of 24 1999, and $122,304.55 for the fourth quarter of 1999. (DSUF 119.) 25 5 26 27 28 The assessed penalties against Mrs. Reynolds concerning CMS and INCON span only eight tax periods, from March 31, 1998 through December 31, 1999. The assessed penalties against Gregory Shore concerning CMS and INCON for eleven tax periods from April 1, 1997 through December 31, 1999. 6 1 The IRS assessed trust fund recovery penalties against Brenda 2 Reynolds relating to Cybergate s outstanding payroll liabilities 3 for seven tax periods running from April 1, 1997 through December 4 31, 1999. 5 amount of $4,861.38 for the first quarter of 1998, $5,178.26 for 6 the second quarter of 1998, $4,619.19 for the third quarter of 7 1998, $4,523.20 for the fourth quarter of 1998, $4,625.13 for the 8 first quarter of 1998, $5,723.50 for the second quarter of 1998, 9 and $5,836.08 for the third quarter of 1998. 10 The IRS assessed penalties against Mr. Shore in the (DSUF 119.) As of July 19, 2009, the total assessed penalties against 11 Brenda Reynolds for CMS, INCON, and Cybergate s federal tax 12 liabilities for all tax periods at issue, including interest, is 13 2,290,843.92. (DSUF 119.) 14 III. PROCEDURAL BACKGROUND. 15 16 On August 8, 2008, Mrs. Wilma Shore, Gregory Shore s mother 17 and an officer, director, and majority shareholder of CMS and 18 INCON, brought suit against the United States pursuant to 28 U.S.C. 19 § 20 personally against her by the IRS. 1346, seeking a refund of trust fund liabilities assessed 21 On December 17, 2007, the United States filed its Answer to 22 Shore s Complaint and asserted a counterclaim against Plaintiff 23 Wilma 24 penalties. 25 against Gregory Shore and Brenda Reynolds, seeking to reduce to 26 judgment certain trust fund recovery penalties assessed against 27 them pursuant to 26 U.S.C. § 6672. 28 Shore seeking (Doc. 8.) to collect the balance of the assessed The United States also raised counterclaims On June 23, 2008, the United States requested the Clerk of 7 1 Court to enter default against Gregory Shore and Brenda Reynolds. 2 (Docs. 20 & 21.) 3 June 24, 2008. The Clerk entered default against both parties on (Docs. 24 & 25.) 4 On July 20, 2009, the United States filed a Motion For Summary 5 Judgment to reduce to judgment the outstanding federal income tax 6 liabilities assessed against Plaintiff and Counterclaim-Defendant 7 Wilma Shore and Additional Counterclaim-Defendants Gregory Shore 8 and Brenda Reynolds. 9 Gregory Shore and Brenda Reynolds, the United States seeks to trust fund (Doc. 52.) penalties to As to Counterclaim-Defendants 10 reduce judgment because they are 11 responsible persons under 26 U.S.C. § 6672 for the unpaid tax 12 liabilities of Dean s Materials, Inc. and Dean R. Shore, Inc., and 13 Cybergate, Inc. 14 To date, neither Gregory Shore nor Brenda Reynolds have moved 15 to set aside the default or opposed the government s summary 16 judgment motion. 17 IV. LEGAL STANDARD. 18 19 Summary judgment is appropriate when "the pleadings, the 20 discovery and disclosure materials on file, and any affidavits show 21 that there is no genuine issue as to any material fact and that the 22 movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 23 56(c). 24 informing the district court of the basis for its motion, and 25 identifying those portions of the pleadings, depositions, answers 26 to interrogatories, and admissions on file, together with the 27 affidavits, if any, which it believes demonstrate the absence of a 28 genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. The movant "always bears the initial responsibility of 8 1 317, 323 (1986) (internal quotation marks omitted). 2 Where the movant will have the burden of proof on an issue at 3 trial, it must "affirmatively demonstrate that no reasonable trier 4 of fact could find other than for the moving party." 5 Thrifty Payless, Inc., 509 F.3d 978, 984 (9th Cir. 2007). 6 respect to an issue as to which the non-moving party will have the 7 burden of proof, the movant "can prevail merely by pointing out 8 that there is an absence of evidence to support the nonmoving 9 party's case." Soremekun v. With Soremekun, 509 F.3d at 984. 10 When a motion for summary judgment is properly made and 11 supported, the non-movant cannot defeat the motion by resting upon 12 the 13 non-moving party must set forth, by affidavit or as otherwise 14 provided in Rule 56, specific facts showing that there is a 15 genuine issue for trial. 16 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986)). 17 non-movant's bald assertions or a mere scintilla of evidence in his 18 favor are both insufficient to withstand summary judgment. FTC v. 19 Stefanchik, 559 F.3d 924, 929 (9th Cir. 2009). 20 must 21 affirmative evidence from which a jury could find in his favor. 22 Id. (emphasis in original). 23 [a] dispute about a material fact is genuine, that is, if the 24 evidence is such that a reasonable jury could return a verdict for 25 the nonmoving party." 26 whether a genuine dispute exists, a district court does not make 27 credibility determinations; rather, the "evidence of the non-movant 28 is to be believed, and all justifiable inferences are to be drawn allegations show a or denials genuine of its own pleading, rather the Soremekun, 509 F.3d at 984. (quoting issue of material fact A [A] non-movant by presenting "[S]ummary judgment will not lie if Anderson, 477 U.S. at 248. 9 In determining 1 in his favor." Id. at 255. 2 V. DISCUSSION. 3 4 5 A. Trust Fund Recovery Penalties Under 26 U.S.C. § 6672 6 The Internal Revenue Code requires employers to withhold 7 federal social security and individual income taxes from the wages 8 of their employees. 9 an employer collects this money each salary period, payment to the takes place on a quarterly basis. Although 10 federal 11 interim, the employer holds the collected taxes in a special fund 12 in trust for the United States. 26 U.S.C. § 7501(a). 13 are known as trust fund taxes. Slodov v. United States, 436 U.S. 14 238, 243 (1978). 15 government See 26 U.S.C. §§ 3102(a), 3402(a). In the These taxes If an employer fails to pay over collected trust fund taxes, 16 the 17 effectuating the collection and payment of trust fund taxes who 18 willfully fail to do so are made personally liable to a penalty 19 equal to the amount of the delinquent taxes under 26 U.S.C. § 20 6672. 21 relevant part: 22 23 24 25 officers or employees of the Slodov, 436 U.S. at 244-45. employer responsible for Section 6672 provides, in 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 ... shall ... be liable to a penalty equal to the total amount of the tax ... not collected, or not accounted for and paid over. 26 26 U.S.C. § 6672. 27 For the purposes of Section 6672, a person includes an 28 10 1 officer or employee of a corporation ... who ... is under a duty to 2 perform the act in respect of which the violation occurs. 26 3 U.S.C. § 6671(b). 4 under Section 6672 if (1) he is a "responsible person"; and (2) if 5 he acts willfully in failing to collect or pay over the withheld 6 taxes. 7 1992). Thus, an individual is liable for a penalty Davis v. United States, 961 F.2d 867, 869-70 (9th Cir. 8 9 1. Gregory Shore 10 a. Responsible Person 11 For purposes of assessing a § 6672 penalty, a responsible 12 party is one who has the final word as to what bills should or 13 should not be paid, and when. 14 837, 838 (9th Cir. 1994). 15 word 16 significant 17 regardless of whether he exercised such control in fact. 18 v. United States, 1 F.3d 932, 937 (9th Cir. 1993). 19 person can be found responsible with respect to any tax quarter at 20 issue, and liability can be imposed on each. 21 United States, 423 F.2d 448, 449 (9th Cir. 1970). 22 turns 23 determine how the corporation conducts its financial affairs; the 24 duty to ensure that withheld employment taxes are paid over flows 25 from the authority that enables one to do so. 26 Jones, 33 F.3d 1137, 1139 (9th Cir. 1994) (citation omitted). when on he possessed control the scope over and Alsheskie v. United States, 31 F.3d A person is deemed to have the final the the authority required corporation's nature of an to exercise financial affairs, Purcell More than one See, e.g., Turner v. Responsibility individual's power to United States v. 27 Mr. Shore admitted during his January 2009 deposition that he 28 was responsible for CMS, INCON, and Cybergate s tax liabilities 11 1 for the relevant periods at issue. 2 admission and the unopposed status of the government s motion, Mr. 3 Shore s liability under 26 U.S.C. 6672 is evaluated under the 4 factors set forth in Hochstein v. United States, 900 F.2d 543, 547 5 (2nd Cir. 1990). These factors include the individual's duties as 6 outlined in the corporate bylaws, his ability to sign checks, his 7 status as an officer or director, and whether he could hire and 8 fire employees. 9 use of the Hochstein factors). 10 There is (DSUF 72-82.) Despite this Id. at 547; See Jones, 33 F.3d at 1140 (approving substantial record evidence that Mr. Shore 11 exercise[d] significant control over the corporation's financial 12 affairs, making him a responsible person under 26 U.S.C. 6672. 13 The United States has submitted evidence that Shore was an officer 14 and director of the corporations, ran the daily operations, had 15 check signing authority, and both hired and fired employees. (DSUF 16 72-82.) 17 significant 18 Cybergate.com. All of this control evidence over indicates the finances that of Mr. CMS, Shore had INCON, and 19 Mr. Shore conceded during his April 27, 1998 IRS Form 4180" 20 interview, that he was running all operations at both CMS and 21 INCON. 22 employees, managed employees, paid bills, and negotiated contracts. 23 (Doc. 59, Exh. 45.) 24 confirmed 25 substantial control over CMS and INCON s finances from 1997-1999. 26 (G. Shore Dep. 200:15-201:7.) (DSUF 76.) his Shore admitted that he hired and fired During his January 2009 deposition, Mr. Shore April 27, 1998 statements and reiterated his 27 The undisputed facts are that Plaintiff was vice-president, 28 secretary, and treasurer of CMS and INCON, actively managed both 12 1 corporations, 2 employees, and on at least one occasion attempted to negotiate a 3 settlement with the IRS concerning outstanding tax liabilities. 4 (DSUF 72-82, 122.) 5 addition to his majority ownership. 6 indicate that Plaintiff had significant control of all three 7 corporation's finances. 8 9 10 had check signing authority, hired and fired Plaintiff had equal powers at Cybergate, in (DSUF 74-75.) These facts As a matter of law, Mr. Shore is a responsible person under 26 U.S.C. 6672. The undisputed facts establish Mr. Shore s responsibility under the Hochstein factors. 11 12 b. Willfulness 13 Having determined that Mr. Shore is a "responsible person" for 14 the relevant tax assessment periods, the remaining question is 15 whether 16 Cybergate s taxes for those periods. 17 is a voluntary, conscious and intentional act to prefer other 18 creditors over the United States. 19 871 (9th Cir. 1992); Klotz v. United States, 602 F.2d 920, 923 (9th 20 Cir. 1979). 21 government or any other bad motive. 22 Klotz, 602 F.2d at 923. 23 such as a desire to meet payroll, may nonetheless be willful. 24 e.g., Phillips v. United States, 73 F.3d 939, 942 (9th Cir. 1996). 25 The standard is further explicated as follows: 26 27 28 Mr. Shore willfully refused to pay CMS, INCON, and In this context willfulness Davis v. U.S., 961 F.2d 867, Willfulness does not require an intent to defraud the Davis, 961 F.2d at 871; Conduct motivated by a reasonable cause, If a responsible person knows that withholding taxes are delinquent, and uses corporate funds to pay other expenses, even to meet the payroll out of personal funds he lends the corporation, our precedents require that the failure to pay withholding taxes be deemed willful. 13 See, 1 Id. (citations omitted). 2 Once a responsible person gains knowledge of a payroll tax 3 deficiency, he is liable for all periods during which he was a 4 responsible party, regardless of whether those periods precede or 5 follow the date he gained that knowledge. 6 F.2d at 873. 7 See, e.g., Davis, 961, Mr. Shore acknowledges that he was aware of financial problems 8 at CMS and INCON as early as 1996. 9 26, 2009 deposition, Mr. Shore testified that he knew about CMS and perilous financial (DSUF 77.) condition and, During his January 10 INCON s specifically, 11 outstanding federal tax liabilities. (DSUF 77, 80.) Nevertheless, 12 Mr. Shore manipulated CMS and INCON s accounts so that CMS and 13 INCON appeared solvent. (DSUF 80.) This included paying creditors 14 other than the IRS as early as 1997: 15 16 Q. Basically by the beginning of calendar year 1997, you were aware that payroll taxes were delinquent to the federal government, is that correct? 17 A. Yeah. Actually before that, but yeah. 18 20 Q. Okay ... at the time when there were outstanding delinquent payroll taxes, were you authorizing obligations other than payroll taxes to be paid out of corporate funds? 21 A. Yes. 22 Q. And what were you authorizing to be paid? 23 A. Uh ... the payroll ... loan payment, suppliers, vendors, utility bills. 19 24 25 26 27 Q. In fact, as needed if money was in CMS, and you needed it to cover something else, you just transferred it, notwithstanding the delinquent payroll taxes, is that correct? A. Correct. Directed it to wherever I felt it was appropriate for it to go, yes. 28 14 the 1 2 Q. So I mean you take responsibility for paying vendors when payroll taxes were overdue, is that correct? 3 A. Yes. 4 Q. And that would go for all of the tax quarters at issue in this case? 5 A. Yes. Every single one. 6 7 (Exh. 3, 198:17-199:18.) 8 9 The evidence supporting § 6672 liability against Mr. Shore is substantial and undisputed. Mr. Shore acknowledges becoming aware 10 of the tax deficiencies of CMS and INCON in early 1997 and of 11 Cybergate in 1998. 12 he failed to ensure payment in full of that deficiency before any 13 other creditors were paid. 14 checks to trade creditors and meeting payroll obligations. The law 15 is 16 responsible person to § 6672 penalties. 17 States, 109 F.3d 570, 573 (9th Cir. 1997) ( If a responsible person 18 knows that withholding taxes are delinquent, and uses corporate 19 funds to pay other expenses ... our precedents require that the 20 failure to pay withholding taxes be deemed willful.") clear that Once Mr. Shore became aware of the deficiency, such a Instead, Mr. Shore continued writing failure is willful and subjects the See Buffalow v. United 21 After viewing the entirety of the evidence in Mr. Shore s 22 favor, drawing all inferences in his favor, there is insufficient 23 evidence to create a genuine issue of material fact concerning Mr. 24 Gregory Shore s liability under 26 U.S.C. § 6672. 25 Summary judgment is GRANTED in favor of the United States. 26 27 /// 28 /// 15 1 2. Brenda Reynolds 2 a. Responsible Person 3 As an employee of CMS and INCON, and not an officer or 4 director, it would appear that the analysis of Mrs. Reynolds 5 responsibility under 26 U.S.C. differs substantially from that of 6 Gregory Shore. 7 that the control necessary to support liability under section 6672 8 is simply the ability to direct or control the payment of corporate 9 funds. However, the Ninth Circuit has consistently held Purcell, 1 F.3d at 936 (quoting Wilson v. United States, 10 250 F.2d 312, 316 (9th Cir. 1958)). 11 he or she has a significant voice in determining what bills should 12 be paid or not paid, and when. 13 A person is "responsible" if Turner, 423 F.2d at 449. The evidence is undisputed that in September 1996, Reynolds 14 was hired as 15 Reynolds first assignment as controller was to review CMS and 16 INCON s liabilities, prioritize the amounts due, and negotiate 17 payment plans with creditors. 18 formulate a plan for payments, discuss the plan with Greg Shore, 19 and then manipulate the timing of these payments to avoid penalties 20 and the appearance of inability to pay. 21 held 22 sufficient funds to cover the checks. checks the to controller various of CMS (Id.) creditors and INCON. (DSUF 56.) Specifically, Reynolds would (DSUF 58.) because CMS Reynolds often did not have (DSUF 57.) 23 From 1997 forward, Reynolds exercised significant authority 24 over corporate finances and accounts payable operations at CMS and 25 INCON. 26 reported to Reynolds concerning accounting matters. (DSUF 59.) In 27 the third and fourth quarters of 1997, as well as in 1998 and 1999, 28 Reynolds signed hundreds of checks on behalf of CMS and INCON and, By early 1997, all of the bookkeepers at CMS and INCON 16 1 along with Greg Shore, decided what creditors to pay first. 2 60 & 66.) 3 (DSUF Signing as Controller for CMS and INCON, Reynolds reviewed and 4 signed Employer s Quarterly Federal Tax Returns for eleven 5 quarters: 6 ending December 31, 1999. 7 payments 8 liabilities during this period.6 9 for CMS and INCON, also signed representative letters to the CMS 10 and INCON s accountant, Hills Renaut, in order to obtain financial 11 statements for 1997 and 1998. 12 Reynolds 13 violations of law concerning the accounting practices of CMS and 14 INCON. the quarter ending June 30, 1997 through the quarter were made by represented (DSUF 62.) INCON that or CMS (Id.) It is undisputed that no against were tax Reynolds, as Controller (DSUF 67.) there employment no In these letters, irregularities or (Doc. 59, Exh. 26.) 15 The facts in this case show that Brenda Reynolds had a status 16 and position at CMS, INCON, and Cybergate to impose on her a legal 17 duty to collect, truthfully account for and pay over to the IRS 18 payroll taxes withheld from the salaries and wages of the company's 19 employees. 20 establish that the individual is a responsible party under § 21 6672. See Davis, 961 F.2d at 877 (holding that a responsible 22 person is 23 regardless of his or her lack of knowledge); United States v. The law is clear that such a status and position anyone who had the authority to direct payment, 24 25 26 27 28 6 Two partial payments were made during the first four months of 1998. These payments were credited to the first and second quarters of 1997. INCON also wrote four $25,000 checks each intended to be partial payments for INCON s tax liability for the second quarter of 1997. All four checks bounced in January 1998. (DSUF 62.) 17 1 Chapman, 7 F. App x 804, 807 (9th Cir. 2001) ([an individual] may 2 be held responsible as long as he had the ability to exercise 3 significant, 4 affairs.). 5 6 not total, control over the company's financial As a matter of law, Mrs. Reynolds is a responsible person under 26 U.S.C. 6672. 7 b. 8 Willfulness 9 The Ninth Circuit defines willfulness as a voluntary, 10 conscious, and intentional act to prefer other creditors over the 11 United States. 12 871); see also Teel v. United States, 529 F.2d 903, 905 (9th Cir. 13 1976). 14 need not be proven. 15 States, 602 F.2d 920, 923 (9th Cir. 1979). 16 is considered to have acted willfully if he or she acted with a 17 reckless disregard of a known or obvious risk that withholding 18 taxes may not be remitted to the government. 19 Kappas v. United States, 578 F.Supp. 1435, 1440 (C.D.Cal. 1983). 20 Willfulness 21 creditors over the United States either before or after the due 22 date for the corporation to remit the withheld taxes. 23 United States at 1440. Purcell, 1 F.3d at 938 (quoting Davis, 961 F.2d at An intent to defraud the government or other bad motive can be Davis, 961 F.2d at 871; proven by showing Klotz v. United A "responsible person" a Teel, 529 F.2d 903; preference of other Kappas v. 24 It is undisputed that Mrs. Reynolds had knowledge of CMS, 25 INCON, and Cybergate s unpaid taxes. (Reynolds Dep. 82:1-107:187.) 26 Relevant to the willfulness analysis, is that although Mrs. 27 Reynolds knew in 1997 that CMS, INCON, and Cybergate, in 1998, were 28 not paying federal payroll taxes, she continued to write checks to 18 1 vendors and to employees for net wages. (DSUF 61 & 66.) Mrs. 2 Reynolds continued this practice in 1998 and 1999. 3 facing federal tax delinquencies, Reynolds continued writing checks 4 to creditors other than the IRS through the end of 1999: (Id.) Still 5 Q: Now did there come a time, though, that when you were holding checks that had been cut to the IRS? 6 A. Yes. 7 Q. or the government? 8 A. Yes... 9 Q. During the time you knew there was a serious employment tax problem, were you still writing checks for payroll accounts to individuals for their wages or to other vendors? 12 A. Yes. 13 Q. You were doing that for both CMS and INCON, is that correct? 14 A. Yes, that s correct. 15 Q. But yet you know the balances weren t paid in full? 17 A. Yes, I knew that. that, yes. 18 Q. And you came to know it roughly six months after you started working there? 20 A. Approximately... 21 Q. And that occurred all the way through 1999? 22 A. Yes. 10 11 16 19 23 Eventually I came to know ( Doc. 59, Reynolds Dep. Exh. 36, 183:7-183:22, 193:4-193:9.) 24 Mrs. Reynolds admitted at her deposition that she made no 25 efforts to use available funds to pay the IRS rather than to meet 26 payroll or other needs. 27 over to IRS, Mrs. Reynolds is liable under 26 U.S.C. 6672. Because of her duty to pay employee taxes 28 19 During 1 the periods in question, Mrs. Reynolds failed to see that these and 2 any other available funds were remitted to the IRS and not to other 3 creditors. 4 2005 WL 2083103 (D. Ariz. Aug. 25, 2005) ( Once a responsible 5 person gains knowledge of a payroll tax deficiency, [he or she] is 6 liable for all periods during which [he or she] was a responsible 7 party. ). 8 was, as a matter of law, willful under Section 6672 during the tax 9 periods at issue in this case. See Schlicht v. United States, No. 03-1606-PHX-RCB, Mrs. Reynolds failure to pay over the payroll taxes 10 After viewing the entirety of the evidence in Mrs. Reynold s 11 favor, drawing all inferences in her favor, there is insufficient 12 evidence to create a genuine issue of material fact concerning Mrs. 13 Brenda 14 judgment is GRANTED in favor of the United States. Reynolds liability under 26 U.S.C. § 6672. Summary 15 16 IV. CONCLUSION. 17 For the reasons discussed above: 18 1. Summary judgment is GRANTED in favor of the United States 19 on its counterclaim against Gregory Shore under 26 U.S.C. § 6672. 20 2. Summary judgment is GRANTED in favor of the United States 21 on its counterclaim against Brenda Reynolds under 26 U.S.C. § 6672. 22 The United States shall submit a form of final judgment 23 consistent with this decision within five (5) days of electronic 24 service. 25 26 IT IS SO ORDERED. 27 Dated: aa70i8 October 9, 2009 /s/ Oliver W. Wanger UNITED STATES DISTRICT JUDGE 28 20
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