Schiffmann v. United States

United States Court of Appeals
For the First Circuit

No. 14-2179

RICHARD SCHIFFMANN,

Plaintiff/Counterclaim Defendant, Appellant,

v.

UNITED STATES OF AMERICA,

Defendant/Counterclaim Plaintiff, Appellee,

v.

STEPHEN CUMMINGS,

Counterclaim Defendant, Appellant.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND

[Hon. Mary M. Lisi, U.S. District Judge]

Before

Lynch, Selya and Kayatta,
Circuit Judges.

David R. Sullivan, with whom Murtha Cullina LLP was on brief,
for appellants.
Douglas C. Rennie, Attorney, Tax Division, U.S. Department of
Justice, with whom Caroline D. Ciraolo, Acting Assistant Attorney
General, Joan I. Oppenheimer, Attorney, Tax Division, and Peter F.
Neronha, United States Attorney, were on brief, for appellee.
January 29, 2016
 SELYA, Circuit Judge. The obligation of a corporate

employer to pay payroll taxes is familiar. The Internal Revenue

Code requires employers to withhold federal income taxes from

employees' wages and to hold such taxes in trust for the United

States. See 26 U.S.C. §§ 3102, 3402, 7501. As a result, such

taxes are often referred to as trust fund taxes. See id. § 7501.

If they are not paid to the government when and as required, the

Internal Revenue Service (IRS) may look past the corporate form

and hold officers of the corporation personally liable under

certain circumstances. See id. § 6672(a).

The court below, in sequential summary judgment rulings,

concluded that the appellants, Richard Schiffmann and Stephen

Cummings, were responsible persons who had wilfully caused ICOA,

Inc. (ICOA) to shirk its payroll tax obligations.1 The appellants

challenge this conclusion. After careful consideration, we

affirm.

I. BACKGROUND

The raw facts are largely undisputed. ICOA is a Rhode

Island corporation, whose subsidiaries provide wireless internet

services in public spaces (such as airports and marinas).2 As far

1 In its earliest filings, the government misspelled
Schiffmann's name (omitting the final "n"). For ease in reference,
we use the correct spelling throughout.

2
We use ICOA as a collective shorthand for ICOA and its
various subsidiaries. One of those subsidiaries, WebCenter

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back as 2002, ICOA began struggling to stay current on federal

trust fund tax obligations.

Schiffmann became ICOA's president in October of 2004

and retained that title after becoming its chief executive officer

(CEO) in April of 2005. Cummings (previously a consultant to the

company) became ICOA's chief financial officer (CFO) in October of

2005. At the latest, the appellants discovered the full extent of

ICOA's outstanding trust fund tax liabilities shortly after

Cummings became CFO. They nonetheless signed checks to pay other

creditors, but did not pay the government. The funds backing these

checks came primarily from cash infusions raised by Schiffmann and

ICOA's board chairman, George Strouthopoulos (Schiffmann's

predecessor as CEO). On November 18, 2005, the ICOA board of

directors (which then consisted of at least four members) met to

discuss, among other things, the outstanding trust fund tax

liabilities. By resolution, the board granted check-signing

authority to ICOA's officers on a schedule depending on debt amount

and officer rank. Schiffmann, as CEO, was given singular signing

authority for checks up to $100,000; Cummings, as CFO, was given

singular signing authority for checks up to $75,000. Matters went

downhill from there: the trust fund tax arrearage was not paid,

new trust fund taxes accumulated, the company's financial decline

Technology, Inc., serves as the paymaster for the ICOA family of
companies.

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continued, and the board fired Schiffmann and Cummings in June of

2006.

Failing to receive payment following notice and demand,

the IRS made trust fund recovery penalty assessments against, inter

alia, Schiffmann and Cummings.3 The IRS proceeded to seize what

funds it could find. For his part, Schiffmann filed an

unsuccessful refund and abatement request. He then repaired to

the federal district court and sought both to recover the sums

previously seized from him and to nullify the assessments. See 26

U.S.C. § 7422.

The government counterclaimed against Schiffmann,

Cummings, and others,4 seeking to recover the remainder of the

overdue taxes and penalties. In response, Cummings counterclaimed

3
In those penalty assessments, the IRS alleged that, as of
March 2014, Schiffmann owed close to $400,000 plus interest for
nearly five full quarters beginning April 1, 2005 and ending June
23, 2006. The IRS further alleged that, as of the same date,
Cummings owed more than $250,000 plus interest for nearly three
full quarters beginning October 1, 2005 and ending June 23, 2006.

4
For the sake of completeness, we note that two other
corporate officers, George Strouthopoulos and Erwin Vahlsing, were
named in the government's counterclaims. Since neither of them is
a party to this appeal, we do not further discuss the government's
counterclaims against them.

Additionally, we note that as to parties other than Schiffmann,
the government's counterclaims were technically cross-claims. See
6 Charles Alan Wright et al., Federal Practice and Procedure
§ 1432, 285 (3d ed. 2010). Nevertheless, the parties and the
district court called them counterclaims, and so will we.

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against the government, seeking to nullify the assessments against

him.

In due course, the government moved for summary judgment

on its counterclaims. The motion was accompanied by the required

statement of material facts not in dispute. See D.R.I. R.

56(a)(2). Schiffmann and Cummings opposed summary judgment, but

neither of them submitted a counterstatement of disputed facts.

See id. R. 56(a)(3). The district court entered summary judgment

for the government. See Schiffmann v. United States, No. 12-695,

2014 WL 1394199, at *11 (D.R.I. Apr. 9, 2014).

The government next moved for summary judgment on the

claims asserted by Schiffmann and Cummings, respectively. Once

again, its motion was accompanied by the requisite statement of

undisputed facts. See id. R. 56(a)(2). Schiffmann and Cummings

opposed the motion, this time submitting the required statement of

disputed facts. See D.R.I. R. 56(a)(3). The district court

granted the government's second summary judgment motion, see

Schiffmann v. United States, No. 12-695 (D.R.I. Oct. 3, 2014)

(unpublished order), and later entered a final judgment to include

sums certain (awarding the government $394,334.28 plus interest

against Schiffmann and $254,280.82 plus interest against

Cummings). This timely appeal ensued.

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II. ANALYSIS

In granting summary judgment, the district court

determined that, as a matter of law, Schiffmann and Cummings were

both responsible persons who had acted wilfully in not paying

ICOA's trust fund taxes. See 26 U.S.C. § 6672. We subdivide our

discussion of the appellants' assignments of error into three

segments.

A. The Legal Landscape.

As a general matter, liability under section 6672(a)

attaches when a "person required to collect, truthfully account

for, and pay over" trust fund taxes "willfully fails" to do so.

This stricture may apply to a corporate officer who is a

"responsible person." See Thomsen v. United States, 887 F.2d 12,

14 (1st Cir. 1989); Caterino v. United States, 794 F.2d 1, 3 (1st

Cir. 1986). For this purpose, "responsible person" is a term of

art: a person within a company who has a duty to collect, account

for, or pay over trust fund taxes. See 26 U.S.C. § 6671(b); Vinick

v. United States (Vinick II), 205 F.3d 1, 7 (1st Cir. 2000). For

any particular corporation, there may be more than one responsible

person. See Harrington v. United States, 504 F.2d 1306, 1312 (1st

Cir. 1974).

Such a determination entails consideration of a

corporate officer's status, duties, and authority. See Lubetzky

v. United States, 393 F.3d 76, 78-80 (1st Cir. 2004). The inquiry

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focuses on the "function of an individual in the employer's

business, not the level of the office held." Caterino, 794 F.2d

at 5. The criteria that typically inform the determination

(sometimes known in this circuit as the Vinick II factors) include

whether the person is an officer and/or director; whether the

person owns shares or otherwise has an equity interest in the

company; whether the person participates actively in day-to-day

management of the company; whether the person has authority to

hire and fire; whether the person "makes decisions regarding which,

when, and in what order outstanding debts or taxes will be paid";

whether the person exercises significant superintendence over bank

accounts and disbursement records; and whether the person is

endowed with check-signing authority. Vinick II, 205 F.3d at 7.

Though this list is not meant to be exhaustive and no one factor

is dispositive, see Jean v. United States, 396 F.3d 449, 454 (1st

Cir. 2005), debt prioritization, control over bank accounts, and

check-signing authority are at the "heart of the matter" because

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

taxes, but chose not to do so." Vinick II, 205 F.3d at 9.

The bottom line, of course, is the extent of the

officer's decisionmaking authority. The ultimate question is

whether the officer "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."

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Moulton v. United States, 429 F.3d 352, 356 (1st Cir. 2005)

(quoting Vinick II, 205 F.3d at 8) (emphasis in original); see

Stuart v. United States, 337 F.3d 31, 36 (1st Cir. 2003) (focusing

on "whether the person possessed sufficient control over corporate

affairs to avoid the default").

Responsibility is determined on a quarter-by-quarter

basis. See Vinick v. Comm'r of Internal Revenue (Vinick I), 110

F.3d 168, 172 (1st Cir. 1997). Thus, responsibility during one

quarter does not equate to responsibility in all quarters. See

Vinick II, 205 F.3d at 11.

A finding that an individual is a "responsible person"

is necessary, but not sufficient, to ground liability for unpaid

trust fund taxes. The government also must show that a responsible

person acted wilfully in failing to see to the payment of the

taxes. In this context, acting wilfully requires "knowledge that

taxes are due and withheld and conscious disregard of the

obligation to remit them." Stuart, 337 F.3d at 36 (quoting

Caterino, 794 F.2d at 6). Wilfullness may be manifested as a

"voluntary, conscious and intentional decision to prefer other

creditors to the United States." Harrington, 504 F.2d at 1311.

Neither a specific intent to cheat the government nor an evil

motive is required. See Caterino, 794 F.2d at 6. "[I]t is enough

if a defendant knows that the taxes are due from the company and

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yet disburses funds for other purposes or knowingly fails to pay

the required sum to the government." Lubetzky, 393 F.3d at 80.

B. The First Grant of Summary Judgment.

Against this backdrop, we turn to the district court's

granting of the government's first summary judgment motion. We

review the entry of summary judgment de novo. See Gomez v. Stop

& Shop Supermkts. Co., 670 F.3d 395, 396 (1st Cir. 2012). In

conducting this tamisage, we read the record in the light most

hospitable to the nonmoving parties (here, the appellants) and

draw all reasonable inferences in their favor. See id. Summary

judgment is appropriate where the record reflects no genuine issue

of material fact and the moving party is entitled to judgment as

a matter of law. See Fed. R. Civ. P. 56(a).

In this instance, our review is channeled by the posture

of the case. The local rules of the United States District Court

for the District of Rhode Island provide in pertinent part:

(a) Statement of Undisputed Facts.

(1) In addition to the memorandum of law
required by [Local Rule of Civil Procedure] 7,
a motion for summary judgment shall be
accompanied by a separate Statement of
Undisputed Facts that concisely sets forth all
facts that the movant contends are undisputed
and entitle the movant to judgment as a matter
of law.

(2) The Statement of Undisputed Facts shall be
filed as a separate document with the motion
and memorandum. Each "fact" shall be set forth
in a separate, numbered paragraph and shall

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 identify the evidence establishing that fact,
including the page and line of any document to
which reference is made, unless opposing
counsel has expressly acknowledged that the
fact is undisputed.

(3) For purposes of a motion for summary
judgment, any fact alleged in the movant's
Statement of Undisputed Facts shall be deemed
admitted unless expressly denied or otherwise
controverted by a party objecting to the
motion. An objecting party that is contesting
the movant's Statement of Undisputed Facts
shall file a Statement of Disputed Facts, which
shall be numbered correspondingly to the
Statement of Undisputed Facts, and which shall
identify the evidence establishing the
dispute, in accordance with the requirements
of paragraph (a)(2).

D.R.I. R. 56(a)(1)-(3). In connection with the first summary

judgment motion, neither appellant filed a statement of disputed

facts as required by D.R.I. R. 56(a)(3).

This failure has consequences. "Valid local rules are

an important vehicle by which courts operate" and "carry the force

of law." Air Line Pilots Ass'n v. Precision Valley Aviation, Inc.,

26 F.3d 220, 224 (1st Cir. 1994). The appellants' failure meant

that all of the facts set forth in the government's statement of

undisputed facts were deemed admitted. See D.R.I. R. 56(a)(3);

see also Nieves-Romero v. United States, 715 F.3d 375, 377 (1st

Cir. 2013).

The facts contained in the statement of material facts

that accompanied the government's first summary judgment motion

plainly showed that each appellant was a responsible person, who

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acted wilfully in failing to pay trust fund taxes. As to

Schiffmann, the government sought to hold him responsible for

nearly five full quarters beginning April 1, 2005 and ending June

23, 2006 (when he was cashiered). Throughout this interval,

Schiffmann was ICOA's president and CEO. He also served as a

director and owned stock in the company. As such, he was deeply

involved in the day-to-day management of ICOA; his functions

included the power to hire and fire, the development of fundraising

strategies, and the formulation of a retention and compensation

plan for ICOA's workforce. Furthermore, he was a signatory on

ICOA's bank accounts, and regularly signed checks. Last but not

least, in November of 2005 the board adopted a resolution

specifically authorizing him to sign financial and contractual

obligations up to $100,000 without a second signature.

There is no question but that Schiffmann's status as CEO

and the wide range of his functions afforded him the kind of

significant suzerainty over ICOA's affairs to avoid defaulting on

taxes. See Stuart, 337 F.3d at 36; Godfrey v. United States, 748

F.2d 1568, 1575 (Fed. Cir. 1984). To cinch the matter,

Schiffmann's deep-seated involvement in the financial affairs of

the company, including his power over ICOA's bank accounts and

payroll, and his check-signing authority, gave him "'effective

power' to pay the taxes." Vinick II, 205 F.3d at 8 (quoting

Barnett v. IRS, 988 F.2d 1449, 1454 (5th Cir. 1993)). After all,

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he had funds at his disposal and the power to allocate them. He

was, therefore, a "responsible person" within the purview of

section 6672(a).

The undisputed facts likewise dictate a finding of

wilfulness on Schiffmann's part. Schiffmann acted wilfully

because — after becoming aware that the trust fund taxes were not

being paid — he did not lift a finger to pay them. Instead, he

allowed the company to use unencumbered funds to pay other

creditors. Given Schiffmann's position and authority, no more was

exigible to undergird a finding of wilfullness. See Jean, 396

F.3d at 454; Thomsen, 887 F.2d at 16-18.

To be sure, Schiffmann argues that he did not learn

specifically or in detail about ICOA's outstanding trust fund tax

liabilities until, at the earliest, October of 2005. But the fact

that he did not contemporaneously know of ICOA's failure to pay

trust fund taxes in earlier quarters does not matter: it is settled

law that when a responsible person realizes that trust fund taxes

have not been paid for prior quarters in which he was a responsible

person, he is under a duty to use all unencumbered funds available

to the company to satisfy those tax arrearages. See Erwin v.

United States, 591 F.3d 313, 326 (4th Cir. 2010); United States v.

Kim, 111 F.3d 1351, 1357 (7th Cir. 1997); Mazo v. United States,

591 F.2d 1151, 1157 (5th Cir. 1979). That rule applies in this

situation: Schiffmann was a responsible person during all the

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quarters at issue (after all, he was president and CEO of ICOA

from April of 2005 through June of 2006), and ICOA had unencumbered

funds at his disposal during the second and third quarters of 2005

and thereafter.

The government's statement of undisputed material facts

also supports the conclusion that Cummings was a responsible person

who wilfully avoided paying ICOA's trust fund taxes for the period

beginning October 1, 2005, and ending June 23, 2006 (when he, too,

was fired). As said, Cummings became CFO of ICOA on October 25,

2005. He served in that capacity for the rest of the period in

question; owned stock in ICOA; was a signatory on two of the

company's principal bank accounts; and enjoyed check-signing

authority up to $75,000.00 without a second signature. Tasked to

manage ICOA's financial health and develop appropriate fiscal

policies, he had access to all of the company's financial records,

including tax and payroll records. He decided which outstanding

bills to pay, and in what order. He was, therefore, a responsible

person who could have paid ICOA's taxes. See Jean, 396 F.3d at

454; Caterino, 794 F.2d at 6 ("Congress has chosen to impose

responsibility on one who has the ability to determine whom a

company will or will not pay.").

It cannot be gainsaid that Cummings acted wilfully. He

knew that the corporation had hefty trust fund tax liabilities

accumulated over a period of years. The expertise he had gained

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as an IRS field auditor makes manifest that he surely must have

understood the extent of his fiduciary obligation with respect to

these liabilities. Yet, following the meeting in which the board

gave him the power to sign checks and contractual obligations up

to $75,000, he exercised that power to pay rent and operational

expenses. The company's tax liabilities went begging. So viewed,

Cummings voluntarily, consciously, and intentionally preferred

other creditors to the United States. See Harrington, 504 F.2d at

1311.

We summarize succinctly. On the record as it stood at

the time of the first summary judgment ruling, there was no genuine

issue as to any material fact. Both Schiffmann and Cummings were

responsible persons during the relevant quarters. Each of them

acted wilfully in failing to pay ICOA's overdue and current trust

fund taxes with unencumbered funds and in prioritizing other

creditors over the government. Consequently, the district court

did not err in granting the government's first motion for summary

judgment.

C. The Second Grant of Summary Judgment.

The government's second summary judgment motion, like

the first, was accompanied by a separate statement of material

facts not in dispute. See D.R.I. R. 56(a)(2). This time, however,

the appellants' opposition included a counterstatement of disputed

material facts. See id. R. 56(a)(3). Both of these statements

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must be taken into account in analyzing the second summary judgment

ruling. Even so, most of the salient facts adduced by the

government in connection with the first summary judgment motion

remain uncontradicted.

To begin, the appellants' counterstatement does little

to undermine the facts, recounted above, showing that Schiffmann

and Cummings were responsible persons who wilfully failed to see

to the payment of trust fund taxes. The counterstatement does,

however, contain some further facts that the appellants suggest

should alter the decisional calculus. We briefly explore the

appellants' four additional arguments.

First, the appellants claim that ICOA's funds were

largely encumbered and, thus, unavailable for tax payments. But

this claim lacks any meaningful support in the record. In this

context, funds are deemed encumbered only if the taxpayer is

legally obligated to use them for some purpose other than the

satisfaction of a preexisting or current trust fund tax liability

and that obligation is superior to the IRS's interest in the funds.

See Nakano v. United States, 742 F.3d 1208, 1212 (9th Cir.), cert.

denied, 134 S. Ct. 2680 (2014). The burden is on the responsible

person to identify disputed facts sufficient to raise a genuine

issue about whether funds used to pay other creditors were

encumbered. See Conway v. United States, 647 F.3d 228, 237 (5th

Cir. 2011).

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 Here, the record contains no facts sufficient to show

the existence of such a legal obligation: ICOA received capital

infusions of more than $500,000 while Cummings was its CFO and

received capital infusions of more than $900,000 while Schiffmann

was CEO. It also received a steady stream of revenue from its

business operations. The appellants have not adduced any

significantly probative evidence sufficient to support a finding

that all or any substantial part of these funds were encumbered by

obligations superior to the obligation owed to the IRS. Contrary

to the appellants' importunings, funds are not encumbered simply

because corporate officers elect to earmark them informally for

specific purposes (such as payroll or trade debts). See Bradshaw

v. United States, 83 F.3d 1175, 1180 (10th Cir. 1995); Kalb v.

United States, 505 F.2d 506, 510 (2d Cir. 1974).

Second, the appellants attempt to draw a distinction

between technical power (that is, the board resolution authorizing

them to make disbursements) and actual power (that is, what

actually happened in the workplace). We rejected this very

argument in Moulton, in which we explained that technical power

versus actual power constitutes a false dichotomy. See 429 F.3d

at 355-56 (collecting cases). The correct legal standard extends

liability to anybody "with responsibility and authority to avoid

the default which constitutes a violation of the statute."

Harrington, 504 F.2d at 1312. Here, the record shows beyond hope

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of contradiction that each appellant had both the responsibility

and the authority to pay ICOA's trust fund taxes.

The appellants' third plaint is that the board of

directors limited their check-signing authority by directing that

it not be used to pay taxes. The record, however, belies this

claim. There is no such limitation on the face of the resolution

adopted by the board of directors. Though two of the directors

may have voiced the sentiment during the November 2005 board

meeting that any payment of taxes should be further deferred, a

majority of the directors expressed no such views. At any rate,

voicing a sentiment is not the same as adopting a resolution by a

majority vote. Cf. R.I. Gen. Laws, §§ 7-1.2-801(a), 806

(stipulating that a majority of a corporation's board of directors

is required to confer authority to act upon a corporate officer).

Fourth, and finally, the appellants argue that they were

subordinate to the wishes of the board of directors, so neither of

them had the final word about which creditors got paid and which

did not. But the fact that someone in the corporate hierarchy may

outrank a corporate officer does not shield that officer from

section 6672 liability. In that context, liability depends on

significant, not exclusive, control over the disbursement of

funds. See Hochstein v. United States, 900 F.2d 543, 547 (2d Cir.

1990); Caterino, 794 F.2d at 5-6; Neckles v. United States, 579

F.2d 938, 940 (5th Cir. 1978). What counts in this case is that,

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given the totality of the circumstances, the only reasonable view

of the evidence is that each appellant possessed and exerted

significant control over ICOA's corporate finances and could have

paid the IRS more money had he been of a mind to do so.

Again, we summarize succinctly. On the full record,

there is no genuine issue as to any material fact. Both Schiffmann

and Cummings were responsible persons during the relevant

quarters, and each of them acted wilfully in failing to see to the

payment of ICOA's overdue and current trust fund taxes.

Consequently, the court below did not err in granting the

government's second motion for summary judgment.

III. CONCLUSION

We need go no further. For the reasons elucidated above,

the judgment of the district court is

Affirmed.

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