Thomas Lewis v. United States

NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
File Name: 09a0487n.06

Nos. 06-5957, 06-5959, 08-5721, 08-5724, 08-5725, 08-5726

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
FILED
THOMAS P. LEWIS ) Jul 13, 2009
) LEONARD GREEN, Clerk
Plaintiff-Appellant )
)
v. )
) ON APPEAL FROM THE
UNITED STATES OF AMERICA ) UNITED STATES DISTRICT
(Internal Revenue Service) ) COURT FOR THE WESTERN
) DISTRICT OF TENNESSEE
Defendant/Third-Party Plaintiff - Appellee )
)
v. )
)
RONALD EDMONDS )
)
Third-Party Defendant )
)

BEFORE: CLAY and ROGERS, Circuit Judges, and JORDAN, District Judge.*

ROGERS, Circuit Judge. When withheld employee income taxes were not turned over to

the Government as required by law, the Internal Revenue Service went against two corporate officers

for the deficient amounts. This is permitted by the Internal Revenue Code, if the officers were

responsible for turning over the withheld sums and willfully failed to do so. The district court—in

a series of orders that present some appellate jurisdiction questions in this court—granted the

*
The Honorable R. Leon Jordan, Senior District Judge of the Eastern District of Tennessee,
sitting by designation.
Nos. 06-5957, 06-5959, 08-5721, 08-5724, 08-5725, 08-5726
Lewis v. United States

Government summary judgment. Because there are genuine issues of material fact regarding

required elements of liability for both officers, reversal of the summary judgment is required.

VisionAmerica was a publicly traded health care company in the field of eye care. Shortly

before its demise, it failed to make its payroll tax payments. Employers such as VisionAmerica are

required to deduct payroll taxes from their employees’ wages and pay them to the Government on

behalf of the employees. See 26 U.S.C. § 3102. The withheld taxes are held in trust for the United

States until paid. See id. § 7501. While the money belongs to the United States, the employer

retains control for a time.

The money of course may not be used to shore up the finances of an enterprise that is at risk.

The Internal Revenue Code accordingly imposes direct liability on any “person required to collect,

truthfully account for, [or] pay over” such taxes if the person “willfully fails” to fulfill these duties.

26 U.S.C. § 6672; see Slodov v. United States, 436 U.S. 238, 246-50 (1978). The law imposes

personal liability on such corporate officers so long as they are “under a duty” to pay the wrongfully

diverted taxes. 26 U.S.C. § 6671.

VisionAmerica failed to pay required payroll taxes from the fourth quarter of 1998 through

the first quarter of 2000. VisionAmerica subsequently went bankrupt, and the Government did not

receive about four million dollars owed in taxes. The Government sought to hold the corporate

officers in this case personally liable because they had been under a duty to pay the corporate payroll

taxes and had willfully failed to pay them. During the relevant period, Tom Lewis was CEO of

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Nos. 06-5957, 06-5959, 08-5721, 08-5724, 08-5725, 08-5726
Lewis v. United States

VisionAmerica, and Ron Edmonds was CFO. Lewis and Edmonds claim that they cannot be held

liable.

Edmonds’s theory of the case is that he was not under a duty to pay the payroll taxes because

VisionAmerica’s board of directors had relieved him of the responsibility to pay the payroll taxes.

In the aftermath of an unrelated accounting problem, the board lost at least some confidence in

Edmonds and reorganized the financial affairs of the company. The board installed Todd Smith to

work with Edmonds. The parties dispute whether Edmonds or Smith had the responsibility to direct

funds to pay the IRS rather than other creditors, but Edmonds concedes that if he had the

responsibility to pay the taxes, his failure to do so was willful.

Lewis argues that he lacked both the authority to pay the taxes and the willfulness necessary

to establish personal liability. In Lewis’s view, despite his apparent control of the company, in

practice the board of directors strictly curtailed his ability to influence the financial affairs of the

company. Moreover, Lewis claims that he had no actual knowledge that VisionAmerica had not paid

the payroll taxes, and thus cannot be liable for willfully diverting funds to other creditors.

The Government contested both taxpayers’ versions of the facts, and the district court granted

it summary judgment on the issue of liability. After canvassing the evidence, the district court

reasoned that the evidence, “aside from Edmonds’ self-serving assertions to the contrary,” showed

that Edmonds “continued to exert control over the Company’s major financial decisions” during the

relevant period. The district court concluded that Lewis bore responsibility for the failure to pay the

taxes due to his considerable authority over VisionAmerica’s affairs. The court further discounted

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Nos. 06-5957, 06-5959, 08-5721, 08-5724, 08-5725, 08-5726
Lewis v. United States

Lewis’s “self-serving contentions,” and based on the testimony of other witnesses concluded that

Lewis’s failure to pay the taxes was willful because “it is obvious” that other VisionAmerica

employees had specifically warned Lewis that payroll taxes had gone unpaid. On September 12,

2005, the court granted summary judgment to the Government against both taxpayers and directed

the clerk of the district court to enter judgment for the Government.

However, the “judgment” that the court entered did not specify the amount of damages that

the court awarded to the Government on its claims. The Government did not timely move to correct

this error under Fed. R. Civ. P. 59(e), but did file a motion about three months later to amend the

judgment under Rule 60(a). The district court rejected that motion because the omitted damages

amount was not a clerical error within the scope of Rule 60(a), but the court implicitly recognized

that its September 12 judgment was not final by directing a magistrate to conduct a hearing on the

proper amount of damages. See Christianson v. Colt Industries Operating Corp., 486 U.S. 800, 817

(1988); United States v. Reid, 357 F.3d 574, 580 (6th Cir. 2004).

Nevertheless, Lewis and Edmonds each subsequently filed a notice of appeal from the

September 12 judgment. The Government moved to dismiss the appeal as taken from a nonfinal

judgment, and we remanded so that the district court could calculate the amount of damages. The

district court did so, and Lewis and Edmonds each filed a notice of appeal from the subsequent order

that specified the amount of damages awarded to the United States. These notices of appeal were

premature because the district court had not yet entered judgment in accordance with this order, but

the notices of appeal nonetheless became effective when the district court later entered final

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Nos. 06-5957, 06-5959, 08-5721, 08-5724, 08-5725, 08-5726
Lewis v. United States

judgment. See Fed. R. App. P. 4(a)(2). The district court subsequently entered an amended

judgment setting forth the amounts awarded from Lewis and Edmonds along with dates to permit

calculation of interest. Edmonds and Lewis then each filed additional notices of appeal, so that the

consolidated appeals of Edmonds and Lewis bear six appellate docket numbers.

Summary judgment in this case was not warranted because, under the familiar summary

judgment standard, viewing the submitted evidence in a light most favorable to Lewis and Edmonds,

there are genuine issues of material fact with respect to each of them.

First, Edmonds shows that disputes remain about material facts that bear on his liability. He

testified that at the relevant time, Smith was responsible for deciding “what was paid and what

wasn’t paid.” Edmonds testified that after the board of directors reorganized the financial affairs of

the company, Edmonds continued to work on resolving VisionAmerica’s earlier underpayments that

had occurred on Edmonds’s watch, but that Smith was in charge of making ongoing payroll tax

payments. Multiple employees testified that after the reorganization, accounting staff reported to

Smith, not Edmonds. If, as he claims, Edmonds was not “one who has authority to direct payment

of creditors,” then he cannot be held liable. See Gephart v. United States, 818 F.2d 469, 473 (6th

Cir. 1987) (quotations omitted).

Smith did testify that Edmonds bore primary responsibility for the payroll taxes at the

relevant time, and that Edmonds still had considerable authority to prioritize payments. But for

summary judgment purposes we must assume that when Smith’s and Edmonds’s stories diverge, the

factfinder may accept Edmonds’s version.

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Nos. 06-5957, 06-5959, 08-5721, 08-5724, 08-5725, 08-5726
Lewis v. United States

The Government argues that Edmonds admitted his responsibility for the payroll tax

deficiencies on an IRS Form 4180. But these admissions appear to relate only to responsibility for

taxes before the disputed period, taxes that have been paid. While a jury might believe the

Government’s theory that the document contains Edmonds’ admissions of responsibility through

December 8, 1999, a jury might also believe Edmonds’s assertion that he only referred to the tax

problems that had developed through the time of the reorganization. The document does not

unambiguously resolve the question of which interpretation is correct. Edmonds testified that he was

not responsible for the continued nonpayment of taxes during the contested period because the board

of directors had relieved him of his responsibilities at that point. Crediting his testimony, as the law

requires at the summary judgment stage, means that sufficient facts are in dispute to warrant a trial

under familiar summary judgment practice.

But, the Government claims, the normal rules of summary judgment somehow do not apply

to tax cases, and “the uncorroborated oral testimony of the taxpayer is insufficient as a matter of law

to overcome summary judgment.” The cases that the Government cites do not, however, support

such a position. Liddy v. Comm’r of Internal Revenue, 808 F.2d 312 (4th Cir. 1986), was an appeal

from a bench trial in the Tax Court, and did not address summary judgment standards at all. The

case dealt with the burden of production at trial when a taxpayer had destroyed corroborating

evidence, see id. at 315, and it is of no help to the Government. Our unpublished decision in

Williams v. United States, Nos. 93-5965, 93-5966, 1995 WL 21431 (6th Cir. Jan. 19, 1995), likewise

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Lewis v. United States

does not support the Government’s position.1 Thus, genuine issues of material fact regarding

liability preclude summary judgment against Edmonds.

Lewis likewise presents genuine issues of material fact sufficient to preclude summary

judgment against him. Factual disputes remain both on whether Lewis had authority to pay the

payroll taxes and on whether he willfully failed to pay them.

Lewis testified that, as CEO, he “spent most of my time on managing day-to-day field

operations and pursuing new development opportunities for the company.” He also “spent a fair

amount of time in shareholder relations, and . . . any special projects that would have been directed

to me by the board of directors.” On the other hand, “financial policy was ultimately directed by the

board of directors.” Lewis was not on the audit committee, which consisted of outside directors and

the chairman of the board. Edmonds, as CFO, reported to the board of directors. Lewis testified that

in practice he did not sign checks without Edmonds’s approval. He testified that “stewardship over

the monetary assets to the company” was with Edmonds. Moreover, he testified that the board of

1
In Williams, we upheld a grant of summary judgment to the Government in a tax case, but
the case did not involve the question of whether the taxpayer’s evidence had shown a genuine issue
of material fact. The case concerned whether the Government’s evidence was legally sufficient to
support the assessment when the taxpayer had conceded liability but offered a “mere general denial
of correctness” of the assessed amount of the tax. See id. at *4. The taxpayer argued that the
evidence supporting the Government’s assessment was insufficient, but “failed to offer any evidence
to rebut” the assessment, and failed to “produce any records” documenting the correct amount of his
liability. See id. at *2. Summary judgment was appropriate because the taxpayer had the burden to
prove the Government’s assessment wrong, but failed to offer anything to meet that burden. See id.
at *4. While Edmonds likewise bears the burden to prove the Government’s assessment wrong, he
has offered evidence in the form of his own testimony that if believed would show that he is not one
who may be found liable.

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Nos. 06-5957, 06-5959, 08-5721, 08-5724, 08-5725, 08-5726
Lewis v. United States

directors rejected his recommendation that it terminate Edmonds as CFO; instead it retained

Edmonds but installed Smith in the reorganized accounting department.

Lewis presented enough disputed evidence to permit a conclusion that he did not have a

“duty” to pay the payroll taxes. Under his version of the evidence, the board of directors had

assigned oversight over financial operations to Edmonds, directly supervised Edmonds, and showed

that it did not follow Lewis’s recommendations about the financial department. A factfinder could

infer that the board would not have supported Lewis had he attempted to override Edmonds’s

decisions about which creditors to pay. A corporate title alone, even that of CEO, is not enough to

establish liability under the statute; the “practical reality” of the corporation matters. See O’Connor

v. United States, 956 F.2d 48, 51-52 (4th Cir. 1992). The required “functional” test requires a

“factual inquiry” into Lewis’s precise role. See Gephart, 818 F.2d at 473. Since Lewis and the

Government have each offered evidence in support of conflicting versions of the facts, a factfinder

will have to conduct that inquiry.

Likewise, Lewis presented enough evidence about whether he willfully failed to pay the

payroll taxes that a factfinder must address that question. Lewis testified that he first learned of

VisionAmerica’s payroll tax delinquency in mid-March of 2000, and that the board of directors

almost immediately removed his authority to influence the problem. To fail willfully to pay the

payroll taxes, Lewis would have to have known that the taxes were delinquent. See Gephart, 818

F.2d at 475. Negligence alone would not establish liability; at a minimum, reckless conduct would

be required. See Calderone v. United States, 799 F.2d 254, 259-60 (6th Cir. 1986).

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Nos. 06-5957, 06-5959, 08-5721, 08-5724, 08-5725, 08-5726
Lewis v. United States

The Government did not present uncontested evidence sufficient to find that Lewis acted

willfully. It points to a meeting in November 1999, but uncontested facts show at most that Lewis,

Edmonds, and others discussed the fact that VisionAmerica had an ongoing dispute with the IRS,

but not that the dispute concerned unpaid payroll taxes. Likewise, undisputed facts show at most

that Lewis had knowledge that the IRS had levied some of the company’s bank accounts, but not that

Lewis knew that the levies were for payroll taxes rather than, as Lewis claims Edmonds told him,

IRS errors concerning the relationship between VisionAmerica and its subsidiaries.

Because genuine issues of material fact remain regarding Lewis’s authority to prioritize

payments to creditors and regarding his knowledge of the payroll tax deficiency during the relevant

period, Lewis must be allowed to make his case to a factfinder.

Viewing the evidence, including each taxpayer’s own testimony, in a light most favorable

to each taxpayer shows that the Government did not establish that it was entitled to summary

judgment against either taxpayer. We therefore reverse the summary judgment entered by the district

court and remand for further proceedings consistent with this opinion.

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