That reminds me of this cautionary tale....... One of the lessons is: "Daddy told me not to pay the tax" is not a defense...........
In re Jory Bernard, Cynthia D. Bernard, Debtors. Jory Bernard, Cynthia D. Bernard, Plaintiffs v. Internal Revenue Service, Defendant
130 B.R. 740, 91-2 U.S. Tax Cas. (CCH) ¶50,516, case 90BK-50223-07, United States Bankruptcy Court for the Western District of Louisiana, Lafayette - Opelousas Div. (July 15, 1991)
Ted W. Hoyt, 315 S. College Rd., Layfayette, La., for plaintiffs. John Bilheimer, Neal Fowler, Department of Justice, Washington, D.C., for defendant.
MEMORANDUM OPINION
BOE, JR., Bankruptcy Judge.
Introduction and Summary
This is an action brought by debtor Jory Bernard challenging assessment against him of approximately $180,000 in penalty tax provided by 26 U.S.C. Secs. 6671 -6672. He does not dispute the nondischargeability in bankruptcy of the taxes remaining unpaid if he is in fact liable for them. [footnote] 1 Amounts paid by him after assessment total $50,837.11. The penalty tax is designed to protect against loss of trust fund income and social security taxes withheld from employee wages. The penalty tax amounts to 100 per cent of the tax loss suffered by the public treasury. Persons are liable for the penalty tax if they are "responsible persons" who willfully fail to collect, or truthfully account for, or pay over such amounts to the Government. Jory has the burden of proof on the responsible person issue. Once found to he a responsible person, Jory also has the burden of proof on the willfulness issues.
Frequently, more than one responsible person is liable for the penalty tax. While liability of each such person is joint and several, the Government can only recoup 100 per cent of its loss. In the present case, the Internal Revenue Service assessed penalty taxes against Jory plus two other officials in a now defunct oilfield service company that used federal withholding taxes as a source of payment for other creditors. Jory Bernard and his father, Joel, were assessed for the quarters ending March 31, 1982; June 30, 1982; December 31, 1982; and March 31,1983 (hereinafter "the tax quarters in controversy"). Exhibit D-7, IRS Certificate of Assessments and Payments. An accountant, Daniel Theriot, was assessed about $144,000.00 for the first two of these quarters. Contrary to the thrust of his testimony at trial, Joel Bernard in 1983 reported that Jory was one of the individuals who authorized or allowed other obligations to be paid during the period that tax liabilities were being accrued. Exhibit D--8, page 2, line 26.
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After consideration of the entire record, the court concludes the assertion that Jory was unaware of the tax arrearage cannot be believed. Jory was too close to his father not to know that there were unpaid trust fund taxes. He also was too involved in too many aspects of the company's business not to know that there were unpaid trust fund taxes. The contention that Jory knew only generally that there was a tax problem--but not a withholding tax problem--further disregards Jory's heavy financial interest in the family business which was his livelihood. Finally, the record rather clearly indicates that Jory was affirmatively apprised of arrearages in trust fund taxes in July 1982. Even if before July 1982 Jory had no control over company disbursements and no knowledge of withholding tax arrearages, the record appears to show that he did afterward, and Jory has not proved otherwise by a preponderance of the evidence. Jory's checkwriting authority placed him a position to pay all back payroll taxes, even those that accrued prior to July 1982, because company revenues were far in excess of what would have been required to pay those taxes. The contention that Jory was disabled from using his checkwriting authority to pay the back withholding taxes by his father's direction that no payments (to anyone) were to be made without his approval is insufficient as a matter of law to exonerate Jory from liability. The law is clear that "following orders" is no defense since a responsible person's first duty is to make the public treasury whole for trust fund taxes, even if this means disregarding the orders of a superior.
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Findings of Fact
Jory Bernard contends that he was not a responsible person and also that he did not willfully fail to pay to the Government taxes due to it from Coppertop Supply Company, a closely held family business. IRS disputes both of these contentions.
Coppertop Supply Company was incorporated in the 1970's. It was an oilfield equipment supply business which purchased both new equipment and used equipment which was refurbished for its customers. With the downturn in Louisiana's oil economy, Coppertop filed a corporate Chapter 11 petition in April 1983. Its case was converted to Chapter 7 in 1984. Plaintiff's father, Joel Bernard, was one of the founders of Coppertop. Joel has been assessed by IRS for each of the four quarters involved in this controversy. Joel had ultimate control over conduct of the business, which had about 100 employees. He was President, could write checks on the business without a co-signator, and was also a shareholder. [footnote] 2 However, the court finds control that Joel exercised over the corporation during all of the tax quarters in controversy was loose. Few corporate formalities were observed. No corporate by-laws formally established who had what authority, and there were apparently no formal meetings of directors or shareholders. Joel was frequently absent from the business for weeks at a time, either on company travel or on vacation. He did maintain frequent contact with his personal secretary by phone, but mainly concerning personal matters. Joel was not a "hands-on" manager.
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Jory, who had worked in the business since his teenage years, was clearly the second-in-command, at least a de facto vice president of the company (although not formally appointed as such), and in charge of day-to-day operations. Jory is currently President of Louisiana Safety System, Inc. This company is in the same line of work as Coppertop, and has about the same number of employees (90 to 100).
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The court finds that Jory was clearly the second-in-command at Coppertop, at least a de facto vice-president, and a substantial shareholder.
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The accounting department was headed by Robert Daniel Theriot. Theriot, about 25 years old, became employed by Coppertop in March 1981 as Comptroller. He was not an officer or director of the company, but like Jory, had the authority to write checks without a co-signator. While Theriot wrote most company checks, Jory had at least some control over the checks that would be paid or not paid by the accounting department even before Theriot was dismissed in July 1982. IRS has assessed Theriot about $144,000 in penalty tax for the first two quarters of 1982.
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Theriot's explanation regarding why trust fund taxes were undeposited and unpaid is that creditors other than the Government were getting paid. Insufficient funds were left over for the Government after these payments. The creditors paid were the "squeaky wheels" who complained about nonpayment, those shipping C.O.D., and employees on the payroll. (Transcript 25-27, 36). Theriot's explanation is firmly corroborated by testimony of other witnesses and exhibits in evidence. Coppertop's receipts, even after the business downturn, were far in excess of what would have been needed to pay the trust fund taxes. [footnote] 4
Conclusions of Law
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For liability to arise under 26 U.S.C. Sec. 6672 , a person assessed with the penalty must meet two requirements. He must in the jargon of the tax trade be a "responsible person". And he must willfully refuse to pay it. The burden of proof is on the taxpayer as to all issues; the IRS assessment is presumed to be correct unless it can be shown to be without rational foundation.
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The court concludes that Jory Bernard, a shareholder and de facto Vice President, was a responsible person during all tax quarters in controversy. Although Jory contends he was never elected as Vice President, a responsible person does not have to be a formally elected officer. Sec. 6671(b) defines the term "person" to include an officer or employee. The liability imposed by Sec. 6672 is not restricted to such persons. It even reaches corporations and other artificial entities. Pacific National Insurance Co. v. United States, 422 F.2d 26, 30 (9th Cir.), cert. denied, 398 U.S. 937, 90 S.Ct. 1838, 26 L.Ed.2d 269 (1970).
That responsible persons do not have to be formally vested with office or even employment in the corporate taxpayer is illustrated in Commonwealth National Bank of Dallas v. United States, 665 F.2d 743 (5th Cir.1982).
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Jory's activities and authority match well with all factors that the Fifth Circuit considers in determining on a case-by-case basis who is a responsible person: (1) holding an office or owning stock in a corporation; (2) managing the day-to-day operations of the business; (3) making decisions as to the disbursement of funds and the payment of creditors; and (4) check signing authority. Turnbull v. United States, 929 F.2d 173, 178 (5th Cir.1991). If Jory knew of the arrearage in trust fund taxes, he would clearly have some liability under Sec. 6672 .
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Jory had signature authority on the company checking account as "Vice President". He could have written checks to pay company taxes. He admitted that his father would have been displeased if he had done so. His father no doubt would have been extremely displeased. That does not exempt Jory from responsible person status under Sec. 6672. The case-law carefully guards trust fund taxes from use as operational cash. The first duty of the responsible person is not to his employer, or even to himself. Howard v. United States, 711 F.2d 729 (5th Cir.1983) held that an individual who was sole signatory on the corporation's main checking account was a responsible person even though the chief executive officer and majority shareholder had ordered him not to pay trust fund taxes. The fact that he might have been fired had he paid the taxes did not make him any less responsible for payment.
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That Jory Bernard is a responsible person does not in and of itself make him liable for penalty tax. The penalty tax can only be imposed if there is a "willful failure". Slodov v. United States, 436 U.S. 238, 254, 98 S.Ct. 1778, 1788, 56 L.Ed.2d 251 (1978). To take an example, a company's comptroller who had been effectively deprived of all power over receipts and disbursements through an agreement between the company's president and an outside financier did not willfully fail to insure that trust fund taxes be paid. Hochstein v. United States, 713 F.Supp. 119 (S.D.N.Y.1989). The willfulness requirement is met when a responsible person voluntarily, consciously, and intentionally causes the corporation to pay other creditors while he is aware that such funds are owed to the Government. Maggy v. United States, 560 F.2d 1372, 1375 (9th Cir.1977); Newsome v. United States, 431 F.2d 742 (5th Cir.1970). The willfulness requirement is also satisfied where a responsible person acts with a reckless disregard of a known or obvious risk that trust funds may not be remitted to the Government.
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Because a responsible person has the burden of disproving willfulness, he must prove that no creditors other than the Government were paid after he became aware of the withholding tax problem. Smith v. United States, 894 F.2d 1549, 1553-1554 (11th Cir.1990). In the case at bar, however, Jory Bernard takes the position that he had no knowledge of the tax problem. This court rejects that position.
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Jory could have written checks on the corporate account to pay the Government, but did not. He wrote checks to make purchases. He also apparently signed payroll checks after July 1982; see Exhibit 2, page 4, item 30a. His failure to utilize his checkwriting authority to make payment of trust fund taxes is willful under Howard and Roth, supra, since the first duty of a responsible person, even one "acting under orders", is to the Government. Jory is liable for all tax quarters in controversy and that liability is nondischargeable in bankruptcy. IRS cannot, however, recoup more than 100 per cent of its loss, collectively, from all who have been assessed.
A judgment consistent with this opinion will be signed upon presentation by counsel for the parties. The court wishes to compliment both counsel on their briefs, representation, and professional demeanor in this proceeding.
[footnote] 1 Income taxes due within 3 years of the date of the filing of the bankruptcy petition are nondischargeable. 11 U.S.C. Secs. 523(a)(1)(A), 507(a)(7)(A). Taxes required to be collected and withheld and for which a debtor is liable in whatever capacity are also non-dischargeable. 11 U.S.C. Secs. 523(a)(1)(A), 507(a)(7)(C).
[footnote] 2 While there is some testimony that Joel owned 100% of the shares of the corporation, the court finds that Joel owned 60% and that his son Jory had a 40% interest.
[footnote] 3 Dan Theriot was not an unbiased witness because of the IRS assessment. But neither was Joel Bernard who, though also the target of an IRS assessment, was clearly trying in testimony to shield his son, Jory. Witness Nancy Theresa Connick had started at Coppertop about the same year that Jory began to work there full time and is now Jory's chief bookkeeper at Louisiana Safety System, Inc. The most credible witness who was a Coppertop employee was Susan Landry Livingston.
[footnote] 4 Exhibit D-3 shows sales of $2,337,014 for the period April 30, 1982 to November 30, 1982. Then Exhibits D-4, D-5, and D-6 show that Coppertop's bank account was credited with deposits of $743,549 from December 30, 1982 to March 31, 1983.
(bolding added).
