PETRESE B. TUCKER, District Judge.
Before the Court are Plaintiff's Motion for Summary Judgment (ECF No. 28), Defendant's Response in Opposition thereto (ECF No. 32), Defendant's Motion for Summary Judgment (ECF No. 29), and Plaintiff's Response in Opposition thereto (ECF No. 31). For the reasons stated in detail below, and upon consideration of the foregoing as well as Plaintiff's First Amended Complaint (ECF No. 3), Defendant's Answer and Counterclaim (ECF No. 6), and Plaintiff's Answer to the Counterclaim (ECF No. 7), Plaintiff's Motion for Summary Judgment is DENIED, and Defendant's Motion for Summary Judgment is GRANTED.
The Parties have submitted cross-motions for summary judgment on the issue of whether the IRS properly determined that Plaintiff — who at various times held himself out to be the owner, president, and corporate officer with oversight over "entire operations on a daily basis"
At the outset, the Court notes that the tax assessment at issue arises under 26 U.S.C. §§ 3102, 3402, and 7501(a). These sections "require employers to withhold federal social security and income taxes from the wages of their employees" and then to hold those taxes "in trust" for the benefit of the United States of America. Greenberg v. United States, 46 F.3d 239, 242 (3d Cir. 1994) (citing 26 U.S.C. §§ 3102, 3402, and 7501(a)).
When employers fail to hold such funds in trust in accordance with the law, the IRS may recover the unpaid trust funds from a person who is legally responsible for the failure to withhold the taxes. Id. The IRS is authorized under 26 U.S.C. § 6672 to impose a "penalty" on a responsible person for up to 100 percent of the value of unpaid taxes. Id. Such penalties are sometimes called "trust fund recovery penalties." See, e.g., First Am. Compl. ¶ 15, ECF No. 3. While the language of § 6672 denotes the tax assessed against such a taxpayer as a "penalty," the assessment is more appropriately conceived of as a civil tool for recovering unpaid taxes. See, e.g., Goodman v. United States, No. 74-666, 1978 WL 4516, at *5 (D.N.J. Jun. 30, 1978) (stating that "[a]lthough called a penalty, it is, in substance, a tax."). In some cases, the United States may, under 26 U.S.C. §§ 7201 and 7202, pursue criminal charges against a person responsible for nonpayment of trust fund taxes, but such criminal charges are not at issue here. Rather, this case involves a civil trust fund recovery penalty.
With this context in mind, the Court will next provide a factual and procedural history based on the undisputed facts in this case before turning to the legal analysis supporting the Court's conclusion that the Plaintiff cannot carry his burden of showing that the IRS's tax assessment against him is incorrect.
From 2000 to about 2016, Plaintiff was the sole shareholder and president of Carson Concrete — a concrete construction company.
In 2008, while Plaintiff was president of Carson Concrete, Carson Concrete bid for and won a construction contract to build a dormitory for Drexel University at 34th and Powelton Streets in Philadelphia.
The decision to hire SS Frames — a company that Plaintiff described as having "little experience"
SS Frames maintained its business address at 625 W. Ridge Pike, Suite A104, Conshohocken, PA — which was also the business address of Carson Concrete and where Plaintiff maintained his own office.
The similarities between Carson Concrete and SS Frames did not, however, stop at shared business addresses, shared phone numbers, and shared work on the Drexel University dormitory project; in many cases, the two companies shared top-level management and employees.
Broadly, the two companies operated in a way that demonstrated to some state authorities the existence of "an interchange of labor."
Not only did John Lewis work for both Carson Concrete and SS Frames in the 2008 timeframe, but Carson Concrete's twenty-year veteran controller, Robert Artz, also performed work for both companies. In various documents, SS Frames listed Robert Artz as its "[c]ontact [p]erson" for Pennsylvania State Worker's Insurance Fund audit purposes.
At some time in 2008, but by no later than mid-January, Plaintiff, while working as the president of Carson Concrete also started working as the president of SS Frames.
For example, on January 18, 2008, Plaintiff approved, signed under penalty of state law, and submitted an "Application for Workers' Compensation Coverage" to the Pennsylvania Department of Labor and Industry.
Then, about a month later, on February 15, 2008, Plaintiff again approved, signed under penalty of state law, and submitted an "Application for Executive Officer Exception" to the Pennsylvania Department of Labor and Industry in connection with SS Frames's earlier application for workers' compensation insurance.
In the months that followed, Plaintiff continued his work as SS Frames's president such that on April 29, 2009, Plaintiff approved, signed, and submitted a Pennsylvania Quarterly Tax Form on behalf of SS Frames.
That Plaintiff was enmeshed with SS Frames's business was confirmed again, in 2012, by Plaintiff himself when he approved, signed under penalty of perjury, and submitted an IRS federal form 940 ("Form 940")
Not surprisingly, given Plaintiff's consistent representations to state authorities over the years that he owned SS Frames and was its president and manager with daily oversight and supervision of its operations, the Pennsylvania Unemployment Tax Office maintained records showing that Plaintiff was the "[o]wner/[r]esponsible [p]arty" for SS Frames and was the president and "100.0%" owner of the company.
On September 12, 2014, the IRS assessed a trust fund recovery penalty against Plaintiff, under 26 U.S.C. § 6672, in the amount of $878,298.18.
Before imposing the tax assessment on Plaintiff, Revenue Officer Kevin Reed, who was assigned to the case, searched the IRS's Integrated Data System ("IDRS") — a database system that contains taxpayer records and "cross-reference" information to identify a corporate taxpayer's possible corporate officers
Officer Reed traveled to the Carson Concrete/SS Frames business address where he asked to speak with Plaintiff in connection with SS Frames.
Having received no response to the IRS 4180 Summonses, Officer Reed then notified Plaintiff of the proposed tax assessment against him by providing Plaintiff with an IRS Form 1153 by certified mail.
It was after the IRS imposed its formal assessment that Plaintiff then actively involved himself in the assessment process by submitting an appeal of the assessment.
On December 15, 2014, the IRS recorded a notice of federal tax lien against Plaintiff based on the 2008 tax assessment and on a separate 2009 tax assessment.
By no later than May 2016, in response to the tax liens and to force the release of the liens, Plaintiff initiated a claim for refund and request for abatement of both the 2008 tax assessment and the distinct 2009 tax assessment.
As part of Plaintiff's request for refund and abatement of the two tax assessments, and shortly after filing his claim, Plaintiff met in person with Revenue Officer Kerry Martin.
Later, Officer Martin learned that while there was no IRS "file" containing "documents" associated with the 2008 and 2009 tax assessments, the tax assessments were otherwise supported by documents including a file created and maintained by Pennsylvania state authorities.
As for the 2008 tax assessment, by letter dated August 31, 2016, the IRS denied Plaintiff's claim for refund and abatement.
Plaintiff timely filed a First Amended Complaint to which the Government filed an Answer and Counterclaim.
The Parties then filed cross-motions for summary judgment, which are ripe for disposition.
Under Rule 56 of the Federal Rules of Civil Procedure, a court shall grant summary judgment in favor of the moving party only "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56. A fact is "material" if it is "one that might `affect the outcome of the suit under governing law.'" Smith v. Johnson & Johnson, 593 F.3d 280, 284 (3d Cir. 2010) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)). A dispute as to a material fact is "genuine" if it "is one that `may reasonably be resolved in favor of either party.'" Lomando v. United States, 667 F.3d 363, 371 (3d Cir. 2011) (quoting Anderson, 477 U.S. at 250).
The movant has the initial "burden of identifying specific portions of the record that establish the absence of a genuine issue of material fact." Santini v. Fuentes, 795 F.3d 410, 416 (3d Cir. 2015). When assessing a motion for summary judgment, the court "must construe all evidence in the light most favorable to the nonmoving party." Id.
The standard of review for cross-motions for summary judgment is identical to the standard applicable to routine motions for summary judgment. Lawrence v. City of Phila., 527 F.3d 299, 310 (3d Cir. 2008) (citing Rains v. Cascade Indus., Inc., 402 F.2d 241, 245 (3d Cir. 1968)). "When confronted with cross-motions for summary judgment . . . `the court must rule on each party's motion on an individual and separate basis, determining, for each side, whether a judgment may be entered in accordance with the summary judgment standard.'" Arsdel v. Liberty Life Assurance Co. of Bos., 267 F.Supp.3d 538, 545 (E.D. Pa. 2017) (citing Erbe v. Conn. Gen. Life Ins. Co., No. Civ. A. 06-113, 2009 WL 605836, at *1 (W.D. Pa. Mar. 9, 2009)).
Taxpayer refund suits are de novo proceedings. Wells Fargo & Co. and Subsidiaries v. United States, 91 Fed. Cl. 35, 75 (Fed. Cl. 2010) (stating that "[t]he Court conducts a de novo review in tax refund suits"); Cook v. United States, 46 Fed. Cl. 110, 113 (Fed. Cl. 2000) (stating that "[i]n tax refund suits, factual issues are tried de novo . . . with no weight given to subsidiary factual findings made by the Service in its internal administrative proceedings."); De Simone v. United States, 2009 WL 5173498, *3 (citing R.E. Dietz Corp. v. United States, 939 F.2d 1 (2d Cir. 1991)) (applying a de novo standard of review). As a de novo proceeding, the district court is ordinarily not permitted "to delve into the [IRS's] reasoning at the administrative decision-making level." De Simone, 2009 WL 5173498 at *4. In other words, "the court does not sit in judgment of the [IRS]; the court places itself in the shoes of the [IRS]." Id. (citing R.E. Dietz Corp., 939 F.2d at 5). Thus, if "admissible evidence exists to support the [IRS's] assessment . . . . it is irrelevant whether it is the same evidence that the [IRS] relied upon in originally making its assessment." Greco, 380 F.Supp.2d 598, 613 (M.D. Pa. 2005).
In de novo tax refund proceedings such as this, an automatic rebuttable presumption of correctness arises when the Government certifies an IRS tax assessment against a taxpayer. Psaty v. United States, 442 F.2d 1154, 1159 (3d Cir. 1971). The Third Circuit has explained that the rebuttable presumption "is a procedural device that places the burden of producing evidence to rebut the presumption on the taxpayer." Anastasato v. C.I.R., 794 F.2d 884, 886 (3d Cir. 1986). This presumption exists both for practical and policy reasons. As a practical matter, the presumption is based on the reality that an IRS tax assessment is generally correct. Psaty, 442 F.2d at 1160 (stating that "[o]nce [a] tax is assessed a rebuttable presumption arises based, in part, on the probability of its correctness."). As a policy matter, the presumption prompts taxpayers "to meet certain bookkeeping obligations placed upon [the taxpayer] by the [tax] Code" and recognizes that "the taxpayer has more readily available to him the correct facts and figures." Id. (citing United States v. Lease, 346 F.2d 696 (2d Cir. 1965)). The presumption also "appropriately request that corporate officers explain their failure to perform duties imposed upon them by law." Id.
Once the Government introduces evidence of a certified tax assessment, which raises the presumption of correctness, the
A "responsible person," under 26 U.S.C. § 6672, is "a person required to collect, truthfully account for or pay over any tax." Quattrone Accountants, Inc., 895 F.2d at 927 (citing Slodov v. United States, 436 U.S. 238 (1978)). The Third Circuit has explained that:
Id. (internal citations omitted) (emphasis added). In deciding whether a person is "responsible," courts consider a non-exhaustive list of factors including:
Greenberg v. United States, 46 F.3d 239, 243 (3d Cir. 1994).
"Under section 6672(a), willfulness is `a voluntary, conscious and intentional decision to prefer other creditors over the Government.' A responsible person acts willfully when he pays other creditors in preference to the IRS knowing that taxes are due, or with reckless disregard for whether taxes have been paid." Brounstein, 979 F.2d at 955-56 (quoting Quattrone, 895 F.2d at 928 (internal citation omitted)). Reckless disregard, in turn, exists where a responsible taxpayer "(1) clearly ought to have known that (2) there was a grave risk that withholding taxes were not being paid and if (3) he was in a position to find out for certain very easily." United States v. Vespe, 868 F.2d 1328, 1335 (3d Cir. 1989) (internal quotation omitted).
In rare situations, however, the introduction of a certified tax assessment may not raise the usual presumption of correctness where the assessment is, despite certification, a "naked assessment without factual foundation." Anastasato, 794 F.2d at 887 (citing Weimerskirch v. Comm'r, 596 F.2d 358 (9th Cir. 1979)). Naked assessments are those "without any foundation whatsoever." United States v. Janis, 428 U.S. 433, 441 (1976) (emphasis added). "[A]n assessment is `naked' and `beyond saving' when [ ] the records supporting an assessment are excluded from evidence, . . . or are nonexistent." Cook, 46 Fed. Cl. at 114. Of course, when considering whether an assessment is naked, courts must be mindful that "what is critical, given the de novo nature of [tax refund] proceedings, is that admissible evidence exists to support the assessment . . . . [and] it is irrelevant whether it is the same evidence that the [IRS] relied upon in originally making its assessment." Id. Accordingly, "courts have repeatedly held that the government may support a tax assessment based on any admissible evidence,
Having set forth the legal principles applicable in this case, the Court turns to the facts presented and concludes that: (1) the tax assessment in this case is not a "naked assessment" and, therefore, the usual presumption of correctness of the tax assessment applies, and (2) Plaintiff has not adduced any evidence that would permit a jury to conclude that Plaintiff has carried his burden of rebutting the presumption of correctness by proving he is not a responsible person or that his failure to pay SS Frames's withholding taxes was not willful.
As an initial matter, the Court concludes that the IRS's tax assessment is not a "naked assessment" because it was not "without any foundation whatsoever" when it was imposed. Janis, 428 U.S. at 441. Even if it was, however, the Government has adduced more than enough evidence to support the validity of the tax assessment in connection with the present de novo proceedings. In stark contrast, as explained in Section IV.B.2, below, Plaintiff has presented no evidence to rebut the presumption of the assessment's correctness.
First, despite Plaintiff's repeated assertion that the IRS "had
In this case, before imposing the 2008 tax assessment on Plaintiff, Officer Reed conducted a search of the IRS's IDRS database and found that Plaintiff's social security number was associated with SS Frames as a possible responsible corporate officer.
Second, even if this basis did not exist or this basis did not suffice at the time the 2008 tax assessment was imposed, the overwhelming evidence now before the Court in this de novo proceeding provides exceptionally strong justification for the assessment, strong enough, at a minimum, to raise the presumption of the assessment's correctness.
While Plaintiff protests that the "Government's efforts to create a paper record post hoc are an affront to Constitutional due process,"
Here, the undisputed facts supporting the 2008 tax assessment are manifold and include, among others:
While these facts are strong enough to support the substantive conclusion that Plaintiff was a responsible person and willfully failed to withhold SS Frames's employees' taxes, these facts, in the first instance, raise the automatic presumption of correctness. Plaintiff's decision to focus on the relative dearth of facts gathered by Officer Reed in connection with the initial 2008 tax assessment is, perhaps, understandable given Plaintiff's failure to adduce any evidence to rebut the presumption of the tax assessment's correctness. Plaintiff's failure, however, necessitates dismissal of his claims because it is Plaintiff's burden to produce evidence that would permit a jury to conclude, by a preponderance of the evidence, that he is not a responsible person. See generally Brounstein, 979 F.2d at 955; Psaty, 442 F.2d at 1160.
Faced with a surfeit of evidence demonstrating that Plaintiff is a responsible person for purposes of § 6672, Plaintiff has offered no contrary evidence to support that he is not. Instead, Plaintiff confirmed in his deposition testimony that on several occasions, and under penalty of law, he signed tax returns on behalf of SS Frames, demonstrated his knowledge of and oversight over SS Frames's business, and made representations to state and federal authorities regarding his role as president and owner of SS Frames. Plaintiff has not adduced any evidence to contradict these facts, facts established by his own statements and by his decisions to sign and certify several official documents. Rather than offer evidence to controvert this evidence, Plaintiff has simply, and incorrectly, attempted to place the burden of proof on the Government even though, as discussed in detail above, the burden of proof in a tax refund case such as this always rests on the taxpayer.
As set forth in detail in Sections II and IV.B.1, above, the evidence shows that Plaintiff had knowledge of and exerted significant control over SS Frames's business. Plaintiff was the sole owner and president of Carson Concrete, which decided to hire SS Frames as a subcontractor on the Drexel University project. Plaintiff, and Carson Concrete, hired SS Frames knowing that Plaintiff was, at its inception, an SS Frames minority shareholder. He then became SS Frames's president and signed official documents certifying that he had become the sole owner of SS Frames. He appointed his twenty-year controller from Carson Concrete, Robert Artz, to be the SS Frames point of contact in connection with a State Workers' Insurance Fund audit. As president of Carson Concrete and president of SS Frames, Plaintiff directed payments out of a Carson Concrete account to pay certain amounts owed by SS Frames while leaving other liabilities unpaid including, for example, SS Frames's federal withholding taxes. Plaintiff's actions establish that he had "significant" if not "exclusive" control over SS Frames. Quattrone, 895 F.2d at 927. As Plaintiff exercised "significant control" over SS Frames, then he was a responsible person under § 6672. Id.
In the face of this overwhelming evidence, Plaintiff offers no contrary evidence except his bald testimony that SS Frames was owned and operated by two unidentified "minorities . . . one was black, one was Hispanic."
Plaintiff can point to no SS Frames business records or Carson Concrete business records dealing with SS Frame to show that Plaintiff, despite being SS Frames's president and shareholder, did not have significant oversight or control over SS Frames. Rather, Plaintiff has confirmed by signing and certifying, under penalty of law, that he had oversight over SS Frames's "entire operations on a daily basis"
Whereas the totality of the evidence shows that Plaintiff was a responsible person, Plaintiff has adduced no evidence that he was not a responsible person. Therefore, Plaintiff cannot carry his burden of overcoming the presumption of correctness of the 2008 tax assessment.
Similarly, Plaintiff has adduced no evidence to show that his failure to pay SS Frames's employer withholding taxes was not willful. Indeed, the undisputed evidence shows that Plaintiff was willful, and even if he was not willful, the evidence nevertheless shows that Plaintiff acted with "reckless disregard for whether taxes ha[d] been paid." Brounstein, 979 F.2d at 955-56. Reckless disregard is enough to meet the willfulness requirement under § 6672 and requires that the taxpayer:"(1) clearly ought to have known that (2) there was a grave risk that withholding taxes were not being paid and if (3) he was in a position to find out for certain very easily." Vespe, 868 F.2d at 1335 (internal quotations omitted).
When asked under oath, Plaintiff testified that he did not "take any steps to ensure that [SS Frames's] payroll taxes were in fact being paid to the IRS.
On the uncontroverted facts before the Court, Plaintiff ought to have known that SS Frames was not paying its federal withholding taxes for at least five reasons.
First, while he was president and sole owner of Carson Concrete, Plaintiff hired his other company in which he held a minority share, SS Frames, to perform work on the Drexel University project. Plaintiff has admitted that he hired SS Frames because he knew that SS Frames had no history of worker injuries, which resulted in lower insurance costs and lower labor costs in general. This shows that Plaintiff had, at a minimum, some level of knowledge about SS Frames's business including that SS Frames had no history of worker injuries and that SS Frames's insurance costs were low.
Second, Plaintiff has admitted that he was a part owner of SS Frames, which had the same business address and telephone number as Carson Concrete.
Third, while he may have started out as a part owner of SS Frames, Plaintiff later became SS Frames's president. As president, he verified and signed SS Frames's state tax returns and other documents submitted to state authorities communicating detailed information about SS Frames's business including, for example, SS Frames's employment levels, costs of insurance, and scope of work. Indeed, Plaintiff represented to state authorities that he supervised SS Frames's business on a daily basis. Plaintiff also listed his controller from Carson Concrete as the point of contact at SS Frames for a state audit of SS Frames's workers' insurance coverage.
Fourth, having taken on the mantel of president at SS Frames, Plaintiff learned that SS Frames was not paying state unemployment compensation taxes and failed to make payments to the State Workers' Insurance Fund. Thus, he knew that SS Frames was not complying with, at a minimum, its state legal and financial obligations.
Fifth, Plaintiff admitted that he knew SS Frames had "little experience" in business and subcontracting. By contrast, Plaintiff had, in his own words, extensive business and construction experience from "running a high-rise construction company for 50 years."
With the foregoing context in mind, Plaintiff should have known that SS Frames was not paying its employee withholding taxes and that, in view of SS Frames's inexperience, there persisted a grave risk that the taxes were not being paid. Plaintiff was also, as an owner, president with fifty years of experience running a construction company, and, thus, was well-positioned to find out for certain whether the withholding taxes were being paid. Therefore, when Plaintiff prioritized payments on behalf of SS Frames, namely the State Workers' Insurance Fund and the Pennsylvania unemployment compensation authorities, over the IRS, Plaintiff willfully violated his duties as a responsible person under § 6672 by having paid "other creditors in preference to the IRS . . . with reckless disregard." Brounstein, 979 F.2d at 955-56 (quoting Quattrone, 895 F.2d at 928 (internal quotations omitted)).
For the foregoing reasons, Plaintiff's Motion for Summary Judgment is DENIED, and Defendant's Motion for Summary Judgment is GRANTED. An appropriate Order follows.
