Jean v. United States

United States Court of Appeals
For the First Circuit

No. 04-1121

PAUL JEAN,

Plaintiff, Appellant,

v.

UNITED STATES,

Defendant, Appellee.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Douglas P. Woodlock, U.S. District Judge]

Before

Selya, Circuit Judge,
Stahl, Senior Circuit Judge,
and Lynch, Circuit Judge.

Timothy J. Burke for appellant.
Michelle B. O'Connor, Attorney, with whom Eileen J. O'Connor,
Assistant Attorney General, and Kenneth L. Greene, Attorney, Tax
Division, Department of Justice, were on brief for appellee.

February 3, 2005
 STAHL, Senior Circuit Judge. The Internal Revenue

Service ("IRS"), acting pursuant to 26 U.S.C. § 6672, assessed a

penalty against Appellant Paul Jean ("Paul"), an employee of Focus

Financial Services ("Focus"), for unpaid income and social security

taxes withheld from the wages of Focus' employees in 1992. Paul

paid a portion of the assessment and, after exhausting his

administrative remedies, sued the IRS in the United States District

Court for the District of Massachusetts for a refund and an

abatement of the balance of the assessment.1 The government filed

a counterclaim, seeking to recover the balance of the assessment.

At the close of the evidence at trial, the district court entered

judgment in Paul's favor. Paul, then, filed a motion to recover

his administrative and litigation costs under 26 U.S.C. § 7430.

The district court, in denying the motion, found that the

government was substantially justified in issuing the assessment

and pursuing the litigation. Paul now seeks review of that denial.

Finding no error, we affirm.

I. Background

In 1985, Michael Pottle ("Pottle") incorporated Focus.

He served as Focus' president and treasurer and was the company's

sole shareholder. Pottle hired George Jean ("George") to serve as

1
See 28 U.S.C. § 1346(a)(1); Ruth v. United States, 823 F.2d
1091, 1093 (7th Cir. 1987) ("The taxpayer is permitted to challenge
an assessment [under § 6672] in the district court merely by paying
a portion of the assessment and then seeking a refund.").

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the company's vice-president and general manager. Initially, Focus

provided debt collection services out of an office in Plymouth,

Massachusetts. By 1987, Focus also had a credit reporting business

in Lynn, Massachusetts.2 Notwithstanding this expansion, even

after 1987, all of the company's bills were paid out of its

Plymouth office.

In 1987, Pottle hired George's son, Paul, to work part-

time as a bookkeeper for Focus. Paul was given full signatory

authority over Focus' bank accounts; that is, he had the power to

disburse funds from the company's accounts.3 Paul, who worked in

the Plymouth office, signed many of the checks issued by Focus,

including checks issued to cover Focus' tax liabilities.

Sometime in 1991, Focus began having financial

difficulties, which culminated in its failure to pay the IRS taxes

that had been withheld from its employees' wages for the first

three quarters of 1992. During those quarters, however, Focus

continued to pay its employees and other creditors.

Paul signed most of the checks that Focus issued in the

first two quarters of 1992--he signed 114 checks, transferring

$284,353.22 to Focus' creditors, of which $202,360.96 was paid to

creditors other than the IRS. On August 2, 1992, during the third

2
Focus ceased operating the credit reporting business and
closed its Lynn office in 1991.
3
Paul was listed as an authorized signatory on the bank cards
for Focus' accounts.

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quarter, Paul relinquished his signatory authority; apparently, he

feared being held liable for Focus' failure to pay the IRS.

On December 20, 1994, pursuant to 26 U.S.C. § 6672, the

IRS proposed to assess Paul for Focus' unpaid withholding

obligations. The IRS viewed Paul as a "responsible person" of

Focus who had willfully failed to pay the company's taxes. Prior

to the issuance of the proposed assessment, in May 1994, Pottle

filed with the IRS a statement in which he averred that he and

George were the only persons with authority over Focus' finances.

Pottle failed to mention that, during much of the relevant period,

Paul had been authorized to disburse, and had in fact disbursed,

money from Focus' bank accounts. Paul appealed the proposed

assessment to the IRS Office of Appeals on January 12, 1995. On

June 28, 1996, the Office of Appeals rejected Paul's challenge.

On August 12, 1996, the IRS assessed a penalty against

Paul in the amount of $31,825.66 for Focus' tax liabilities for the

first three quarters of 1992, the period from January 1, 1992 to

September 30, 1992. The IRS made a like assessment against George.

Paul and George, on November 16, 1999, each paid the IRS $84.00 and

filed refund claims with the agency. The claims were denied, and

on June 30, 2000, Paul and George sued the IRS in district court

for refunds of the sums paid and an abatement of the balance of the

assessment. In response, the government filed counterclaims

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against Paul and George for the portion of the assessment that

remained unpaid.4

During discovery, Pottle and Paul were deposed.5 At his

deposition, Paul stated that he had the authority to write checks

to pay Focus' smaller bills, "certainly [invoices] under $100, for

example," without first obtaining approval from Pottle or George.

However, he said that he did not have the authority to pay Focus'

"larger invoices--telephone bills, for example," without obtaining

prior approval. Paul testified that there were no "specific . . .

criteria that [were] employed [to distinguish the smaller bills

from the larger ones]."

In addition, Paul acknowledged that once Focus began

experiencing financial difficulties, he participated in daily

meetings with Pottle and George during which Focus' financial

obligations were discussed and it was decided which bills were to

4
It appears that, in 1998, the IRS reduced the amount of the
assessment against Paul because Pottle had paid Focus' taxes for
the third quarter of 1992. Accordingly, the government insists
that it never sought to collect third quarter taxes from Paul in
connection with the litigation in question. Because neither the
allegations in the government's counterclaim nor its subsequent
behavior in the litigation rendered its position as to the third
quarter taxes clear, in deciding the issues raised in this appeal,
we assume that the IRS sought to collect third quarter taxes from
Paul.
5
George was also deposed, but neither party has identified his
deposition as relevant to this appeal.

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be paid.6 The extent of Paul's involvement in the meetings and in

the ultimate decision as to which creditors were to be paid is

unclear from the deposition transcript. Paul also admitted that,

in 1992, he was aware that Focus had not paid its taxes but that it

was paying its employees' salaries and other obligations.

Pottle testified at his deposition that Paul lacked the

authority to make independent spending decisions. But, Pottle also

stated that, at all relevant times, George was responsible for the

day-to-day operations of the company's business in Plymouth. And,

Pottle said that he rarely visited the Plymouth office after the

first few years of Focus' existence.

Following the close of discovery, Paul filed a motion for

summary judgment in which he asserted that the undisputed facts

established that he was not a person responsible for the payment of

taxes by Focus because he never had the authority to decide which

of Focus' creditors were to be paid. At the same time, Paul filed

an affidavit in which he maintained that he was nothing more than

a clerical employee of Focus; he insisted that he: (1) "did not

have the authority . . . to determine which creditors were to be

paid"; (2) "was not an officer, shareholder or director"; (3) "was

controlled by [] Pottle"; (4) "did not have the actual ability to

6
Paul testified that "as the financial situation grew tighter,
then virtually any bill and any creditor would have been paid in
consultation with [] Pottle."

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establish financial policies or procedures"; and (5) "did not have

the ability to hire or fire employees."

The government opposed the motion, arguing that the scope

of Paul's authority to determine which of Focus' creditors were to

be paid was in dispute. The government pointed out that, at his

deposition, Paul testified that he had the authority to pay certain

creditors without prior approval and participated in daily meetings

with Pottle and George concerning Focus' financial obligations.

The district court allowed the motion in part and denied

it in part. It concluded that, for the period from January 1, 1992

through August 1, 1992 (the first, the second, and part of the

third quarter), there was a genuine dispute as to whether Paul had

the requisite decision-making authority to render him a person

responsible for payment of taxes by Focus. By contrast, it

reasoned that Paul's relinquishment of his check-signing authority

on August 2, 1992 left him in a position where, after that date, he

clearly lacked authority to pay taxes. Therefore, the district

court allowed the motion as to the period from August 2, 1992

through September 30, 1992 and denied it as to the period from

January 1, 1992 through August 1, 1992.

After the close of evidence at trial, Paul filed a motion

for a directed verdict, which the district court allowed. Paul

then moved for administrative and litigation costs under 26 U.S.C.

§ 7430. The government opposed the motion, claiming that it was

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substantially justified in taking the position that Paul was liable

for Focus' tax deficiencies. The district court agreed with the

government and denied the motion. Paul now seeks review of that

denial.

II. Discussion

We have not previously addressed the question of what

standard of review applies to a district court's ruling on a motion

for costs pursuant to 26 U.S.C. § 7430. We will follow our sister

circuits and review the district court's determination that Paul

was not entitled to costs under § 7430 for abuse of discretion.

See, e.g., United States v. Bisbee, 245 F.3d 1001, 1007 (8th Cir.

2001); Wilkerson v. United States, 67 F.3d 112, 119 (5th Cir.

1995); Cooper v. United States, 60 F.3d 1529, 1531 (11th Cir.

1995); Awmiller v. United States, 1 F.3d 930, 930 (9th Cir. 1993);

Wilfong v. United States, 991 F.2d 359, 364 (7th Cir. 1993); Pate

v. United States, 982 F.2d 457, 459 (10th Cir. 1993).

A. Statutory Framework

At the outset, we review the statutory framework relevant

to this appeal.

1. 26 U.S.C. §§ 3102, 3402, 6672

The Internal Revenue Code requires employers to withhold

federal income taxes from their employees' wages. Slodov v. United

States, 436 U.S. 238, 242-43 (1978); see 26 U.S.C. §§ 3102(a),

3402(a). The withheld sums are to be paid to the IRS on a

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quarterly basis. Slodov, 436 U.S. at 243. "An employer who fails

to pay taxes withheld from its employees' wages is . . . liable for

the [unpaid] taxes . . . ." Id. Moreover, 26 U.S.C. § 6672(a)

extends liability for unpaid taxes by providing:

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.

For purposes of § 6672(a), a "'person' . . . includes an officer or

employee of a corporation . . . who . . . is under a duty to

perform the act in respect of which the violation occurs." 26

U.S.C. § 6671(b). Thus, an employee may be liable under § 6672(a)

if he (1) is a person who is "required to collect, truthfully

account for, [or] pay over" the taxes (a "responsible person"),7

and (2) "willfully" fails to do so. See Thomsen v. United States,

887 F.2d 12, 14 (1st Cir. 1989). An individual deemed liable under

§ 6672(a) bears the burden of proving that he was not a responsible

person and does not meet the willfulness requirement. Stuart v.

United States, 337 F.3d 31, 36 (1st Cir. 2003); see Lubetzky v.

7
Although § 6672(a) "defines a responsible person as one who
is 'required to collect, truthfully account for, and pay over any
tax,' . . . the Supreme Court has interpreted the statute to apply
to any person who has a duty to do any one of those things, see
Slodov, 436 U.S. at 250 . . . ." Vinick v. United States, 205 F.3d
1, 7 n.6 (1st Cir. 2000) (emphasis added).

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United States, No. 01-2357, 2004 WL 2997888, at *3 (1st Cir. Dec.

29, 2004).

There is no single factor that determines whether an

individual is a responsible person.8 Vinick, 205 F.3d at 8.

Indicia of responsibility include whether the individual:

(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.9

Id. at 7 (citation omitted); see Lubetzky, 2004 WL 2997888, at *3.

However, "the crucial inquiry is whether the person had the

effective power to pay the taxes--that is, whether he had the

actual authority or ability, in view of his status within the

corporation, to pay the taxes owed." Vinick, 205 F.3d at 8

(internal quotation marks and citations omitted). Therefore, the

final three factors in the above list are the most significant

8
Of course, "[t]here may be more than one responsible person."
Stuart, 337 F.3d at 36.
9
"Importantly, . . . authority to sign checks, without more,
is a weak pillar on which to rest a liability determination that a
person is properly subject to a . . . penalty under section 6672."
Vinick, 205 F.3d at 10 (internal quotation marks and citation
omitted). A "court must look at the check-signing authority in the
context of financial control." Id.

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"because [they] identif[y] most readily the person who could have

paid the taxes, but chose not to do so." Id. at 9.

To act willfully under § 6672, one "must have some

knowledge of failure or risk of failure to remit the employment

taxes." Cooper, 60 F.3d at 1532; see Lubetzky, 2004 WL 2997888, at

*3; Stuart, 337 F.3d at 36.

2. 26 U.S.C. § 7430

While § 6672 imposes liability for unpaid taxes,

§ 7430(a) establishes that an individual wrongly deemed liable

under § 6672 for unpaid taxes may recover both his administrative

and litigation costs. Section 7430(a) provides:

In any administrative or court proceeding
which is brought by or against the United
States in connection with the determination,
collection, or refund of any tax, interest, or
penalty . . . , the prevailing party may be
awarded a judgment or a settlement for--
(1) reasonable administrative costs
incurred in connection with such
administrative proceeding within the [IRS],
and
(2) reasonable litigation costs
incurred in connection with such court
proceeding.

Thus, to be eligible for an award of administrative costs,

litigation costs, or both, an individual must establish that he is

a "prevailing party."10 26 U.S.C. § 7430(a). An individual is a

10
An individual must also meet a number of additional
requirements that we need not address to decide this case. See,
e.g., 26 U.S.C. §§ 7430(b)(1) ("A judgement for reasonable
litigation costs shall not be awarded . . . unless . . . the
prevailing party has exhausted the administrative remedies

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"prevailing party" if he "has substantially prevailed with respect

to the amount in controversy[] or . . . the most significant issue

or set of issues presented," 26 U.S.C. § 7430(c)(4)(A)(i), and his

"net worth did not exceed $2,000,000 at the time the civil action

was filed," 28 U.S.C. § 2412(d)(2)(B); see 26 U.S.C.

§ 7430(c)(4)(A)(ii). However, even if these requirements are met,

an individual "shall not be treated as the prevailing party . . .

if the United States establishes that [its] position . . . in the

proceeding was substantially justified." 26 U.S.C.

§ 7430(c)(4)(B)(i).11

The government's position in an administrative proceeding

is its "position . . . as of the earlier of . . . the date of the

receipt by the taxpayer of the notice of the decision of the [IRS]

Office of Appeals, or . . . the date of the notice of deficiency."12

available . . . within the [IRS]."), 7430(b)(3) ("No award for
reasonable litigation and administrative costs may be made . . .
with respect to any portion of the administrative or court
proceeding during which the prevailing party has unreasonably
protracted such proceeding.").
11
The government's "position . . . shall be presumed not to be
substantially justified if the [IRS] did not follow its applicable
published guidance in the administrative proceeding." 26 U.S.C.
§ 7430(c)(4)(B)(ii).
12
The date of the notice of deficiency is the date on which the
IRS formally assesses the penalty for nonpayment, not the date on
which it issues its proposed assessment. Compare 26 U.S.C.
§ 7430(c)(7)(B) (referring to "the date of the notice of
deficiency") with 26 U.S.C. § 7430(c)(2) (referring to "the date of
the notice of deficiency" and "the date on which the first letter
of proposed deficiency which allows the taxpayer an opportunity for
administrative review in the [IRS] Office of Appeals is sent").

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26 U.S.C. § 7430(c)(7)(B). The government's position in a judicial

proceeding is its "position . . . at the onset of the litigation,"

Nalle v. Comm'r of Internal Revenue, 55 F.3d 189, 191 (5th Cir.

1995), and at "each [subsequent] stage of the case," Huffman v.

Comm'r of Internal Revenue, 978 F.2d 1139, 1148 (9th Cir. 1992).

A "position . . . is substantially justified if it has a reasonable

basis in both law and fact, a determination made on a case by case

basis." Bisbee, 245 F.3d at 1007. The government's loss in the

underlying litigation is not determinative of whether its position

was substantially justified. See, e.g., Nalle, 55 F.3d at 192

("[I]f at the onset of litigation the error was not obvious, the

[government] may still be substantially justified in defending an

ultimately unsuccessful position.").

B. Application of Facts to Law

Paul claims that the district court erred when it denied

his motion to recover the administrative and litigation costs he

incurred after the IRS initially took the position that he was

liable for Focus' unpaid taxes. The government, however, insists

that the district court correctly found that because the government

was substantially justified in rejecting Paul's challenge to the

proposed assessment and in pursuing the litigation, Paul should not

be treated as a prevailing party under § 7430 and, therefore,

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should not be permitted to recover his costs.13 Thus, the question

for us is did the district court abuse its discretion in finding

that the government was substantially justified in taking, and in

pursuing, the position that, for the first three quarters of 1992,

Paul was a responsible person who willfully failed to pay Focus'

taxes and, therefore, was liable for its tax liabilities under §

6672.

1. Administrative Costs

On the record before us, we cannot say that the district

court abused its discretion in finding that the IRS was

substantially justified when it initially took the position that

Paul was liable for Focus' tax deficiencies for the quarters in

question.14 At that point, the IRS knew that Paul had full

authority to disburse funds from Focus' bank accounts for the first

two quarters in question and at least part of the third.15 In

13
The government concedes that Paul has met the other
prevailing party prerequisites. See 26 U.S.C. §§ 7430(c)(4)(A)(i),
7430(c)(4)(A)(ii).
14
The date the IRS Office of Appeals rejected Paul's challenge
to the proposed assessment, June 28, 1996, is the relevant date for
purposes of this appeal. See supra note 12 and accompanying text.
15
Even if, at the time in question, the IRS possessed evidence
that Paul had relinquished his signatory authority during the third
quarter (and it is not clear from the record that it did), that
would not change our view as to the reasonableness of the district
court's finding. See Brown v. United States, 591 F.2d 1136, 1140
(5th Cir. 1979) ("[A]n . . . employee need not be responsible for
the payment of withholding taxes at the end of the quarter in order
to be a responsible person for that quarter.") (citing Slodov, 436
U.S. at 247).

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addition, it knew that Paul had signed many of the checks Focus had

issued during those quarters. Furthermore, the IRS did not then

possess reliable evidence that Paul lacked authority to pay Focus'

tax liabilities. Although, prior to the point at which the IRS

took its position, Pottle had provided the agency with a statement

in which he affirmed that he and George had complete authority over

Focus' finances, Pottle had neglected to mention (and the IRS was

aware) that, for much of the relevant period, Paul had the

authority to disburse, and had disbursed, significant sums from

Focus' bank accounts. Thus, Pottle's statement was of questionable

probative value. The denial of Paul's request for administrative

costs is affirmed. Cf. Bisbee, 245 F.3d at 1007 (noting that the

IRS's position "is not reasonable where the agency is possessed of

[compelling] evidence indicating that the [individual] had no

authority to pay taxes"); Cooper, 60 F.3d at 1531-32 (same).

2. Litigation Costs

Similarly, the district court did not abuse its

discretion when it decided that the government was substantially

justified in (1) taking the position that Paul was liable under

§ 6672 for Focus' tax liabilities at the onset of the litigation

and (2) refusing to abandon that position at the close of

discovery.16

16
We make this determination assuming that, both at the onset
of litigation and at the close of discovery, the government
possessed evidence that Paul had relinquished his signatory

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 At the onset of litigation, the information available to

the government was the same as that which was available to the IRS

when it initially took its position. The government knew that Paul

had authority to disburse, and had disbursed, funds from Focus'

accounts during the relevant quarters, and it did not then possess

reliable evidence that Paul (1) lacked the authority to decide

which of Focus' creditors were to be paid, see Vinick, 205 F.3d at

8 (To be a responsible person, one must have "the actual authority

. . . to pay the taxes owed."), or (2) was not aware of Focus' tax

liabilities, see Cooper, 60 F.3d at 1532 (To act willfully, one

"must have some knowledge of failure or risk of failure to remit

the employment taxes."). Cf. Sharp v. United States, 145 F.3d 994,

996 (8th Cir. 1998) (holding that the government's position was not

substantially justified because "[n]ot only is it clear that

[taxpayer] did not have the authority to pay the withholding taxes,

it is also clear from the record that the government was aware of

the limitations on [taxpayer's] authority before it filed its

counterclaim"). Thus, the district court did not abuse its

discretion in finding that the government was substantially

justified in initially pursuing the litigation, particularly given

that it was Paul's burden to prove that he was not a responsible

authority during the third quarter. See cases cited supra note 15.
Furthermore, we recognize that it is not entirely clear that Paul
stated the second of the two issues in the accompanying text to the
district court. Nevertheless, for purposes of this appeal, we
assume that the second issue was clearly stated.

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person and did not meet the willfulness requirement, see Stuart,

337 F.3d at 36.

Although the government possessed additional information

by the close of discovery--the deposition testimony of Paul and

Pottle and Paul's affidavit, we do not think the district court

abused its discretion in finding that the government was

substantially justified in continuing to pursue the litigation. At

his deposition, Paul stated that, throughout much of the relevant

period, he could pay Focus' smaller bills without first obtaining

approval from Pottle or George. Although Paul said that he could

not pay Focus' larger bills without prior approval, he acknowledged

that there were no "specific . . . criteria that [were] employed

[to distinguish the smaller bills from the larger ones]." Paul

also testified that he was involved in daily meetings with Pottle

and George during which it was decided which of Focus' bills would

be paid. And, Paul admitted that he was aware that Focus was not

paying its taxes. Not only did Paul's statements fail to establish

that he was not a responsible person of Focus,17 they suggested that

his actions would satisfy § 6672's willfulness requirement.

17
Paul appears to argue that his testimony that "as the
financial situation grew tighter, then virtually any bill and any
creditor would have been paid in consultation with [] Pottle" made
it clear that he was not a responsible person. But, all Paul said
was that he paid "virtually any bill and any creditor . . . in
consultation with [] Pottle" (emphasis added); he did not say that
he could pay bills only if Pottle directed him to do so, and he did
not say that he had no influence over the decision regarding which
creditors would be paid and which would not.

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 Pottle's deposition testimony does not undermine the

district court's finding of substantial justification. Although

Pottle testified that Paul did not have the authority to make

independent spending decisions, Pottle was not responsible for the

day-to-day operations of, and spent little time in, the office in

which Paul worked. Therefore, it was not evident that Pottle

possessed sufficient actual knowledge to testify as to the scope of

Paul's authority. Moreover, Pottle's testimony about the extent of

Paul's authority was inconsistent with Paul's, and as a result, it

was not unreasonable for the government to seek clarification of

Paul's status within Focus at trial. Cf. Barton v. United States,

988 F.2d 58, 60 (8th Cir. 1993) ("[T]he Government could not

reasonably rely on [limited management and supervisory powers and

restricted signature authority] in the face of uncontradicted

evidence that [taxpayer] had no authority over tax matters.").

Similarly, the existence of Paul's affidavit does not

undermine the district court's finding. While Paul may have stated

in the affidavit that he had no actual authority to pay Focus'

taxes, he failed to explain why his representations in the

affidavit were inconsistent with his deposition testimony, and he

provided no evidentiary support for those representations. Thus,

the government was entitled to test Paul's credibility at trial.

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 In view of all of the above, the district court's denial

of Paul's request for litigation costs is affirmed.18

Affirmed.

18
As a final matter, Paul argues that because the IRS failed
to follow "applicable published guidance," IRS Policy Statement P-
5-60, a presumption should have arisen that the government's
position was not substantially justified. See 26 U.S.C.
§ 7430(c)(4)(B)(ii). The government maintains that Policy
Statement P-5-60 was not "applicable published guidance" within the
meaning of § 7430(c)(4)(B)(ii). We need not decide that issue,
because the IRS's position was not inconsistent with the Policy
Statement, which provides:
Responsibility is a matter of status, duty, and
authority. Those performing ministerial acts without
exercising independent judgment will not be deemed
responsible.
In general, non-owner employees of the business entity,
who act solely under the dominion and control of others,
and who are not in a position to make independent
decisions on behalf of the business entity, will not be
asserted the trust fund recovery penalty.
At the relevant stages of the case, it was unclear whether Paul had
the authority to pay the IRS and to what degree Paul was involved
in the decision-making process concerning the payment of Focus'
creditors. Therefore, Paul was not entitled to the presumption,
and consequently, the district court did not err in refusing to
apply it.

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