Greenberg v. United States

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit

1-20-1995

Greenberg v USA
Precedential or Non-Precedential:

Docket 94-7075

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 UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

___________

No. 94-7075
___________

MARK Z. GREENBERG,
Appellant

v.

UNITED STATES OF AMERICA;
DEPARTMENT OF THE TREASURY;
INTERNAL REVENUE SERVICE,
Appellees

___________

Appeal from the United States District Court
for the Middle District of Pennsylvania
(D.C. Civil Action No. 92-cv-00642)

District Judge: Honorable Sylvia H. Rambo

___________

Argued: August 9, 1994

PRESENT: HUTCHINSON and NYGAARD, Circuit Judges,
and LUDWIG, District Judge*

(Filed December 15, 1994)

____________

Robert E. Chernicoff, Esquire (Argued)
Paige F. Macdonald, Esquire
Farr & Cunningham
2320 North Second Street
P.O. Box 1855
Harrisburg, PA 17105
Attorneys for Appellant

_______________
* Hon. Edmund V. Ludwig, United States District Judge for the
Eastern District of Pennsylvania, sitting by designation.
Loretta C. Argrett, Esquire
Assistant Attorney General
David Barasch, Esquire
United States Attorney
Gary R. Allen, Esquire
Jonathan S. Cohen, Esquire (Argued)
Billie L. Crowe, Esquire
Tax Division
United States Department of Justice
P.O. Box 502
Washington, DC 20044
Attorneys for Appellees

____________

OPINION OF THE COURT
____________

HUTCHINSON, Circuit Judge.

Appellant, Mark Z. Greenberg ("Greenberg"), appeals an

order of the United States District Court for the Middle District

of Pennsylvania granting summary judgment in favor of appellee,

United States of America ("United States"), on Greenberg's claim

for a partial refund of an amount Greenberg paid on an Internal

Revenue Service ("IRS") penalty assessment, and on the United

States' counterclaim to reduce the balance of the assessment to

judgment. In doing so, the district court upheld IRS's

assessment of a 100% "penalty" against Greenberg under section

6672 of the Internal Revenue Code of 1954 (the "Code"), 26

U.S.C.A. § 6672 (West Supp. 1994), after finding that Greenberg

was a "responsible person" who had "willfully" failed to pay over

to IRS federal employment taxes owed by his employer, Turning

Basin, Inc. ("Turning Basin" or the "Company"). We will affirm.
 I. Factual & Procedural History

Turning Basin was a holding company which acquired

other companies through leveraged buyouts. Greenberg, a

certified public accountant since 1973, served initially as an

outside accountant for Turning Basin while employed by Alan

Moskowitz & Company. In late 1979, Greenberg accepted the

position of in-house controller at Turning Basin. Soon after

joining Turning Basin, Greenberg became its treasurer and

assistant secretary and signed at least one corporate document, a

loan guarantee, in this capacity. Greenberg also served as a

member of Turning Basin's Board of Directors and in 1981 he

received 40,000 shares of Turning Basin stock. Throughout

Greenberg's tenure with Turning Basin, Arthur Tuchinsky

("Tuchinsky") was Chairman of its Board of Directors, as well as

its Chief Executive Officer and controlling shareholder.

As controller of Turning Basin, Greenberg supervised a

staff of one accountant and two bookkeepers and was responsible

for the hiring and firing of employees within his department.

Although Greenberg acknowledged he exercised this authority, he

contended that decisions on hiring and firing were ultimately

determined by Tuchinsky. Greenberg also testified that Tuchinsky

set the salaries of all of Turning Basin's employees and

officers.

As controller, Greenberg was also responsible for

preparing financial statements and reports on the Company's

subsidiaries. These statements and reports were included in

quarterly or semi-annual reports to Turning Basin's stockholders.
Greenberg coordinated Turning Basin's annual audits with its

outside accounting firm and his department was responsible for

overseeing payment of Turning Basin's creditors and reconciling

the Company's checking account. He was an authorized signatory

on all of Turning Basin's bank accounts and signed checks on all

of them. Turning Basin's corporate checkbooks were first kept in

Greenberg's office and later in the bookkeepers' office.

Greenberg had access to these checkbooks at all times. At his

deposition, Greenberg stated that although he had constant access

to the Company's checkbooks and was an authorized signatory, he

only wrote checks when directed to do so by Tuchinsky. Greenberg

also testified that he was not authorized to raise cash on behalf

of the Company or make wire transfers for Turning Basin without

specific permission from Tuchinsky.

Sometime in 1981, Turning Basin began having cash-flow

problems. Greenberg then became responsible for reviewing the

accounts payable with Tuchinsky and assisting Tuchinsky in

determining which creditors should be paid first. Once Greenberg

and Tuchinsky decided who would be paid, Greenberg would sign

checks to pay them. Whenever a check was returned for

insufficient funds, the bank or creditor would contact either

Greenberg or Tuchinsky in order to resolve the matter. According

to Greenberg's deposition testimony, he and Tuchinsky would again

discuss which current bills were most urgent and Tuchinsky would

decide who to pay and where to find the money to pay them.

Greenberg testified that he never refused to pay anyone that
Tuchinsky told him to pay, nor did he ever pay any creditor

Tuchinsky told him not to pay.

Greenberg was also responsible for preparing and filing

Turning Basin's federal tax returns, including its federal

employment tax returns on Forms 940 and 941. By 1981, Turning

Basin was delinquent in remitting the withholding taxes to IRS.

Greenberg was aware of the tax delinquency from the time it

began. He testified that he discussed the tax delinquencies with

Tuchinsky and repeatedly recommended that the taxes be paid.

Greenberg testified that Tuchinsky assured him the taxes would

get paid, and that Greenberg had believed these assurances. He

admitted, however, that on at least one occasion Tuchinsky

informed him that they must pay more urgent bills right away in

order to keep the business going and would pay the taxes later.

Greenberg therefore continued to write checks to

Turning Basin's employees and other creditors despite the

existing withholding tax delinquencies. Because Tuchinsky was

responsible for placing money in Turning Basin's checking

accounts, Greenberg did not write a check to IRS for the

withholding tax delinquencies because he knew there would be no

funds in the account to cover the check. Greenberg also believed

that if he did issue a check to IRS without Tuchinsky's approval,

he would have been fired immediately. He acknowledged that he

could have authorized wire transfers of cash from the subsidiary

corporations' accounts to Turning Basin's accounts without

Tuchinsky's instructions but did not do so because he felt it was

beyond his authority.
 Eventually, Tuchinsky told Greenberg to write checks to

cover the withholding tax delinquencies. Greenberg did so, and

when the checks were returned for insufficient funds, Greenberg

confronted Tuchinsky. When he realized the tax liability would

not be paid, Greenberg resigned as an officer and director of

Turning Basin.

On February 9, 1987, the IRS entered an assessment

under 26 U.S.C.A. § 6672(a) against Greenberg for Turning Basin's

delinquent withholding taxes. Greenberg paid $4,024.26 toward

the assessment and on May 13, 1992 filed a complaint in the

United States District Court for the Middle District of

Pennsylvania seeking a refund. The United States filed an answer

on October 6, 1992 along with a counterclaim seeking $14,456.52

plus interest which it claimed Greenberg still owed under the

penalty provision.

On June 1, 1993, the United States filed a motion for

summary judgment, which the district court granted on December 3,

1993. On February 4, 1994, the court entered an order amending

the judgment to reflect Greenberg's additional payment of

$2,335.13, making the balance due $23,881.68. The balance

included $11,760.29 in interest which had accrued up to

December 3, 1993.
 II. Jurisdiction & Standard of Review

The district court had subject matter jurisdiction over

this action pursuant to 28 U.S.C.A. §§ 1340, 1346(a)(1) (West

1993) and 26 U.S.C.A. §§ 7401, 7402 (West 1989). The district

court had jurisdiction over the United States' counterclaim

pursuant to 28 U.S.C.A. § 1346(c) (West 1993). We have

jurisdiction over the final order of the district court pursuant

to 28 U.S.C.A. § 1291 (West 1993).

We review the district court's grant of summary

judgment de novo. United States v. Carrigan, 31 F.3d 130, 133

(3d Cir. 1994). We consider all of the facts and inferences in

the light most favorable to Greenberg, the nonmoving party, in

order to determine whether there is a genuine issue of material

fact. If no genuine issue of material fact remains, the moving

part is entitled to judgment as a matter of law.1 Id.

III. Analysis

Sections 3102 and 3401 of the Code require employers to

withhold federal social security and income taxes from the wages
1
. Greenberg filed his notice of appeal on January 31, 1994 but
the district court did not enter its order amending the judgment
to add interest until February 7, 1994. Once the district court
acts on a motion to amend the judgment we have jurisdiction over
the initial judgment or order identified in the notice of appeal,
but a party seeking review of a motion that was outstanding at
the time the initial notice of appeal was filed must file an
amended notice of appeal. See Fed. R. App. P. 4(a)(4). No
amended notice was filed. We note, however, that the parties to
this appeal do not contest the amount of the judgment or the
imposition of interest. Thus, the sole issue before us is
Greenberg's liability for withholding tax. This was definitively
decided by the district court's initial order.
of their employees. 26 U.S.C.A. §§ 3102, 3401 (West Supp. 1994).

The taxes withheld constitute a special fund held "in trust" for

the benefit of the United States. 26 U.S.C.A. § 7501(a) (West

1989). Section 6672 of the Code imposes a penalty on certain

persons for failure to turn over withholding taxes to the IRS.

26 U.S.C.A. § 6672(a) (West Supp. 1994). Specifically, it

provides:
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. . . .

Id.

There are two conditions before liability can be

imposed under section 6672: first, the individual must be a

"responsible person," and second, his or her failure to pay the

tax must be "willful." See Carrigan, 31 F.3d at 133; Brounstein
v. United States, 979 F.2d 952, 954 (3d Cir. 1992). If an

individual's conduct fails to meet either condition, the IRS may

not assess a section 6672 penalty against him. With this in

mind, we consider whether the district court correctly concluded

that Greenberg was a responsible person who acted willfully when

he failed to pay over Turning Basin's withholding taxes.
 A. Responsible Person Under Section 6672

For purposes of section 6672, a "person" is defined as

"an officer or employee of a corporation . . . under a duty to

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

U.S.C.A. § 6671(b) (West 1989). Anyone falling within this

definition is generally referred to as a "responsible person."

Stated another way, a responsible person, for purposes of section

6672(a), is one who is "required to collect, truthfully account

for or pay over any tax due to the United States." Carrigan, 31

F.3d at 133 (citing Brounstein, 979 F.2d at 954).

"'Responsibility is a matter of status, duty, or

authority, not knowledge.' While a responsible person must have

significant control over the corporation's finances, exclusive

control is not necessary." Brounstein, 979 F.2d at 954 (citation

omitted) (quoting Quattrone Accountants, Inc. v. IRS, 895 F.2d

921, 927 (3d Cir. 1990)). In determining whether an individual

is a person responsible for paying over withholding taxes, courts

consider the following factors:
(1) contents of the corporate bylaws, (2)
ability to sign checks on the company's bank
account, (3) signature on the employer's
federal quarterly and other tax returns, (4)
payment of other creditors in lieu of the
United States, (5) identity of officers,
directors, and principal stockholders in the
firm, (6) identity of individuals in charge
of hiring and discharging employees, and (7)
identity of individuals in charge of the
firm's financial affairs.

Id. at 954-55. It is not necessary that an individual have the

final word on which creditors should be paid in order to be
subject to liability under section 6672; a person may be treated

as "responsible" for purposes of the statute if he has

significant control over the disbursement of corporate funds.

United States v. Vespe, 868 F.2d 1328, 1332 (3d Cir. 1989).

The case before us is clearly distinguishable from the

facts involved in Carrigan. There, we held the United States was

not entitled to summary judgment on its claim of section 6672

liability because there was evidence that the taxpayer was not a

"responsible person." In Carrigan, the taxpayer was not

responsible for handling the financial affairs of the company,

nor did he prepare, maintain or have access to any of the

corporate books, records or checkbooks. Furthermore, the

taxpayer in Carrigan did not handle any creditors' bills nor

negotiate with any creditor on behalf of the company. See

Carrigan, 31 F.3d at 133-34.

In contrast, Greenberg was an authorized signatory on

all of Turning Basin's corporate checking accounts and had

unrestricted access to them at all times. This record clearly

shows that Greenberg used this power and signed most of the

payroll checks issued during his tenure at Turning Basin, as well

as checks written to a variety of other creditors, including the

United States. Greenberg was also an officer of the Company, a

member of its Board of Directors and a minority shareholder.

Greenberg was aware of the employment tax delinquency

as soon as it arose. He wrote checks to pay other creditors

while knowing that withholding tax liabilities to the United
States remained unpaid.2 As controller of Turning Basin,

Greenberg was in charge of the accounting department and

supervised the reconciliation of checking account statements. He

also completed various tax forms. Furthermore, Greenberg

reviewed Turning Point's accounts payable with Tuchinsky,

assisted Tuchinsky in determining which creditors should be paid

and signed checks to pay creditors and meet payroll. According

to Greenberg's own testimony, he and Tuchinsky discussed which

creditors needed to be paid most urgently, i.e., which creditors

were threatening to cut off crucial services or supplies, and

then decided who to pay. Finally, Greenberg played a role in the

hiring and firing of employees.

Our conclusion that Greenberg is a responsible person

for purposes of section 6672 is supported by all of the evidence.

The fact that Greenberg was instructed by Tuchinsky to pay

creditors other than the United States despite the existence of

withholding tax delinquencies and the fact Greenberg feared for

his job were he to independently issue a check for the

delinquency do not negate his status as a responsible person.
2
. The dissent argues that Greenberg's check-writing function
was merely ministerial, and that any checks Greenberg wrote were
"worthless unless and until Tuchinsky deposited money into the
checking account to cover them." See infra, typescript at 3,
lines 12-16. The record shows that Greenberg wrote checks to
other creditors and they were successfully negotiated. Instead
of issuing these checks, Greenberg could have chosen to write
checks to the United States. We recognize that the record also
contains evidence tending to show that Greenberg would have lost
his job when Tuchinsky discovered he had paid IRS but, as the
dissent acknowledges, the threat that a person will be fired if
he pays withholding taxes does not excuse a responsible person
from the obligation to pay IRS.
"Instructions from a superior not to pay taxes do not . . . take

a person otherwise responsible under section 6672(a) out of that

category." Brounstein, 979 F.2d at 955 (citing Gephart v. United

States, 818 F.2d 469, 474-75 (6th Cir. 1987); Roth v. United

States, 779 F.2d 1567, 1571-72 (11th Cir. 1986); Howard v. United

States, 711 F.2d 729, 734 (5th Cir. 1983)). We agree with the

district court that this record does not leave any material

questions of fact on Greenberg's responsibility for paying

Turning Point's withholding taxes under section 6672.

B. Willfulness Under Section 6672

The fact that Greenberg is a responsible person does

not end our inquiry because IRS may impose section 6672 liability

only if a responsible person "willfully" fails to collect,

account for or pay over the withheld taxes. 26 U.S.C.A.

§ 6672(a). We have stated, "[u]nder 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
(citations omitted) (quoting Quattrone, 895 F.2d at 928). In

order for the failure to turn over withholding taxes to be

willful, a responsible person need only know that the taxes are

due or act in reckless disregard of this fact when he fails to

remit to IRS. "Reckless disregard includes failure to

investigate or correct mismanagement after being notified that
withholding taxes have not been paid." Morgan v. United States,

937 F.2d 281, 286 (5th Cir. 1991) (per curiam); see also Vespe,

868 F.2d at 1335. The taxpayer need not act with an evil motive

or bad purpose for his action or inaction to be willful.

Hochstein v. United States, 900 F.2d 543, 548 (2d Cir. 1990).

Any payment to other creditors, including the payment of net

wages to the corporation's employees, with knowledge that the

employment taxes are due and owing to the Government, constitutes

a willful failure to pay taxes. See Datlof v. United States, 252

F. Supp. 11, 32-33 (E.D. Pa.), aff'd, 370 F.2d 655 (3d Cir.

1966), cert. denied, 387 U.S. 906 (1967).

Thus, Greenberg's failure to pay the withholding taxes

Turning Basin owed IRS is willful if he paid other creditors,

including employees, knowing that the withholding taxes were due.

It is no defense that the corporation was in financial distress

and that funds were spent to keep the corporation in business

with an expectation that sufficient revenue would later become

available to pay the United States. See Emshwiller v. United

States, 565 F.2d 1042, 1045-46 (8th Cir. 1977); Hochstein, 900

F.2d at 548-49. It is also not a defense that a taxpayer would

lose his job if he signed a check to the IRS without the express

authority of a superior. Brounstein, 979 F.2d at 956; accord
Howard v. United States, 711 F.2d 729, 733-34 (5th Cir. 1983)

(responsible persons' failure to ensure payment of withholding

taxes where chief executive officer ordered him not to pay taxes

still willful for purposes of section 6672). Finally, the

assurance by another that the taxes will be taken care of is not
a defense to liability under section 6672. See Denbo v. United

States, 988 F.2d 1029, 1033-34 (10th Cir. 1993).

Like the taxpayers in Brounstein and Vespe, this record

clearly demonstrates Greenberg's knowledge that Turning Basin had

not paid withholding taxes due IRS when he was signing checks to

Turning Basin's employees and other creditors. See Brounstein,

979 F.2d at 956; Vespe, 868 F.2d at 1335. Greenberg does not

contend that he was unaware of the outstanding tax liability, nor

does he dispute that he wrote checks to other creditors despite

his knowledge of the outstanding tax liability. The record

clearly demonstrates that Greenberg acted willfully in failing to

ensure payment of the withholding taxes to the IRS. As a

responsible person, he therefore exposed himself to liability

under section 6672. Thus, the district court did not err when it

granted summary judgment in favor of the United States and

against Greenberg on both Greenberg's complaint and the United

States' counterclaim.

IV. Conclusion

For these reasons, we will affirm the order of the

district court.

Greenberg v. U.S., et al, No. 94-7075
NYGAARD, Circuit Judge, dissenting.

26 U.S.C. § 6672 provides that a person responsible for

withholding and paying over taxes who willfully fails to do so is

liable for a penalty equal to the total amount of the unpaid

taxes. Because I think the facts of this case do not establish

Greenberg's responsibility as a matter of law, I would reverse

the summary judgment of the district court. Hence, I dissent.

Responsibility under section 6672 "is a matter of

status, duty or authority, not knowledge." Quattrone

Accountants, Inc. v. IRS, 895 F.2d 921, 927 (3d Cir. 1990). A

person is responsible within the meaning of section 6672 "if the

person has significant, though not necessarily exclusive, control

over the employer's finances." Quattrone Accountants, 895 F.2d

at 927. "Significant control" means "the final or significant

word over which bills or creditors get paid." Id.; see Gephart

v. United States, 818 F.2d 469, 473 (6th Cir. 1987) (stating that

the test for responsibility focuses on "the degree of influence

and control which the person exercised over the financial affairs

of the corporation and, specifically, disbursements of funds and

the priority of payments to creditors."); Godfrey v. United
States, 748 F.2d 1568, 1576 (Fed. Cir. 1984) (defining

responsibility in terms of a person's "power to compel or

prohibit the allocation of corporate funds."). Thus, in

Quattrone Accountants, we found an accounting firm to be a

responsible person because it
 paid UDF's [the employer's] monthly bills
without prior approval. Consistent with this
authority, [it] had possession of signature
stamps of the treasurer and president of UDF.
The only limitation on this authority was
that each month [it] had to present to the
Board of UDF the bills it had paid for the
previous month. . . .

Quattrone Accountants, 895 F.2d at 927. Factors we have looked

to in determining whether a person has significant control over

an employer's finances include:
(1) that person's duties under the employer's
corporate bylaws; (2) his or her ability to
sign checks on the employer's bank account;
(3) the signature on the employer's federal
quarterly and other tax returns; (4) the
payment of other creditors in lieu of the
United States; (5) the identity of the
officers, directors and principal
stockholders of the employer; (6) the
identity of the individuals in charge of
hiring and firing employees; and (7) the
identity of the individuals in charge of the
employer's financial affairs.

Brounstein, 979 F.2d at 955.

The district court held that Greenberg was a

responsible person as a matter of law. It correctly noted that

the definition of "responsible person" is not limited to the

person with the final say on which bills get paid, but includes

others as well. See Quattrone, 895 F.2d at 927; see also Vespe,

868 F.2d at 1332 ("More than one individual may be a responsible

[pe]rson for a given employer."). The district court concluded,

primarily from Greenberg's authority to sign checks, that he had

such "significant say." Dist. Ct. Op. at 10.
 I disagree that Greenberg's responsibility was

established here as a matter of law. I think that the district

court placed too much reliance on Greenberg's check-writing role.

That is one factor, relevant to the question of responsibility,

but not the only one. See Godfrey, 748 F.2d at 1575 ("The

mechanical duties of signing checks and preparing tax returns are

. . . not determinative of liability under § 6672."). The reason

that check-writing ability is often significant is "because it

generally comes with the ability to choose which creditors will

be paid." Burack v. United States, 461 F.2d 1282, (Ct. Cl.

1972). Here, however, it may not have. Greenberg has offered

evidence that his check-writing functions were merely

ministerial, done at Tuchinsky's behest and requiring his prior

approval, and that, although Greenberg could write the checks,

they were worthless unless and until Tuchinsky deposited money

into the checking account to cover them.

The government does not dispute this evidence; it

simply points to the other indicia of Greenberg's status. I

think that this makes Greenberg's responsibility a question for

the jury. The issue is "for the trier of fact to determine, upon

all the evidence, taking into account questions of credibility

and those reasonable inferences flowing from the evidence which

may establish, or fail to establish, that [Greenberg] possessed a

sufficient degree of authority over corporate decisionmaking so

as to make him a responsible person within section 6672. . . ."

Jay v. United States, 865 F.2d 1175, 1179 (10th Cir. 1989).
 The district court reasoned that a finding of

responsibility was dictated by Brounstein. I disagree.

Brounstein was not only the treasurer of the company (like

Greenberg), but also was president and under the corporate bylaws

had the authority to exercise managerial control. Brounstein,

979 F.2d at 955. Additionally, although most of the checks

Brounstein wrote for the company were at the direction of its

principal, he also (unlike Greenberg) issued checks without the

principal's approval. Id.

We did say in Brounstein that "[i]instructions from a

superior not to pay taxes do not, however, take a person

otherwise responsible under section 6672(a) out of that

category[]," id. at 955 (emphasis added). That, however, does

not foreclose the possibility that Greenberg might not be

responsible in the first place. The government's reliance on

Howard v. United States, 711 F.2d 729 (5th Cir. 1983) and other

courts of appeals cases following Howard3 is, for the same
reason, misplaced. In Howard, the Fifth Circuit stated:
The fact that Jennings [Howard's superior]
might well have fired Howard had he disobeyed
Jennings' instructions and paid the taxes
does not make Howard any less responsible for
their payment. Howard had the status, duty
and authority to pay the taxes owed, and
would only have lost that authority after he
had paid them. Authority to pay in this
context means effective power to pay. That
Howard had that authority is demonstrated by
the fact that he did issue small checks

3
. Gephart v. United States, 818 F.2d 469 (6th Cir. 1987); Roth
v. United States, 779 F.2d 1567 (11th Cir. 1986).
 without Jennings' approval on a number of
occasions. . . .

Id. at 734 (citations omitted). These cases simply say that, if

a person is responsible, a superior's instructions not to pay the