United States Court of Appeals
For the First Circuit
No. 98-2143
ARNOLD W. VINICK,
Plaintiff, Appellant,
v.
UNITED STATES,
Defendant, Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Robert E. Keeton, U.S. District Judge]
Before
Stahl, Circuit Judge,
John R. Gibson,* Senior Circuit Judge,
and Lynch, Circuit Judge.
Howard R. Palmer, with whom Lawrence F. O'Donnell and
O'Donnell, O'Donnell and O'Donnell, were on brief, for
appellant.
Teresa E. McLaughlin, Attorney, with whom Loretta C.
Argrett, Assistant Attorney General, and Gilbert S. Rothenberg,
Attorney, were on brief, for appellee.
March 8, 2000
_____________________
*Of the Eighth Circuit, sitting by designation.
STAHL, Circuit Judge. Plaintiff-appellant Arnold W.
Vinick appeals the district court's determination that he
personally is liable for withholding taxes that Jefferson
Bronze, Inc. (“Jefferson Bronze”) failed to pay. Previously
this court vacated a determination that Vinick was a
“responsible person” within the meaning of section 6672(a) of
the Internal Revenue Code and remanded for further proceedings
consistent with our opinion. See Vinick v. United States, 110
F.3d 168 (1st Cir. 1997) (appeal from summary judgment in the
government's favor) (hereinafter Vinick I). Following a bench
trial, the district court again ruled in the government's favor
by finding Vinick to be a responsible person. We reverse.
I.
A.
To ease the logistical burden on employees and to aid
in the collection of taxes, the Internal Revenue Code requires
employers to withhold from employees' wages social security and
federal income taxes. See 26 U.S.C. §§ 3102, 3402 (1994). The
money withheld is held by the employer in trust for the United
States. See id. § 7501. This system protects from later
recourse the employees who are deemed to have paid their taxes,
even if the employer fails to pay the Internal Revenue Service
(“IRS”) the money it withheld. See Caterino v. United States,
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794 F.2d 1, 3 (1st Cir. 1986) (noting that the IRS “has no
recourse against employees who have had income and social
security taxes withheld from their wages”). The Code renders
liable for the taxes due those it deems to be responsible
persons who willfully have neglected to pay the withheld money.
See 26 U.S.C. § 6672. In pertinent part, § 6672 states:
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.
Liability under § 6672 falls upon those persons who
satisfy both prongs of a two-part inquiry. First, the person
must be “responsible” for collecting, accounting for, and paying
over the taxes; second, if, and only if, the person is deemed
responsible, he is liable if he acted “willfully” within the
meaning of this section. See, e.g., Vinick I, 110 F.3d at 170;
Caterino, 794 F.2d at 3; Harrington v. United States, 504 F.2d
1306, 1312-13 (1st Cir. 1974). Because we already have
determined as a matter of law that Vinick acted willfully, see
Vinick I, 110 F.3d at 174, the only issue before us is whether
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the record supports the district court's conclusion that Vinick
was in fact a responsible person. We hold that it does not.
B.
We review the record in the light most favorable to the
government. See United States v. Ven-Fuel, Inc., 758 F.2d 741,
744-45 (1st Cir. 1985) (noting that “we present the facts and
the reasonable inferences therefrom in the manner most
hospitable to the appellee, to the extent consistent with record
support”).
Vinick, a certified public accountant, has been in
private practice since 1962. Prior to that time, he worked for
the IRS for eight years. While in private practice, Vinick
became acquainted with Richard M. Letterman, then a practicing
attorney.1 In 1981, Letterman, Peter Mayer, and Vinick formed
Jefferson Bronze for the purpose of operating a foundry. Norman
Leach, who owned a foundry in Salem, Massachusetts, sold them
the necessary assets. Letterman was Leach's attorney, Vinick
was his accountant, and Mayer was Letterman's brother-in-law.
Jefferson Bronze received from the Small Business
Administration (“SBA”) a loan to acquire the assets from Leach.
1
In 1992, Letterman pled guilty to four counts of larceny
and one count of embezzlement by a fiduciary. He subsequently
was disbarred and received a two-year prison sentence. The
charges were unrelated to his involvement in Jefferson Bronze.
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Letterman, Mayer, and Vinick, who each owned one-third of
Jefferson Bronze's stock, personally guaranteed the SBA loan and
pledged their homes as collateral. Letterman became the
president and clerk. Vinick was the treasurer. Mayer was
neither an officer nor a director, but he was the day-to-day
manager of the foundry.
Throughout the history of his involvement in the
corporation, Vinick never gave up his accounting practice and
never had an office at Jefferson Bronze. Although Letterman and
he both were signatories on the company's checking accounts,
Vinick never signed checks prior to the company's filing of its
Chapter 11 petition. Vinick, however, did prepare the
corporation's quarterly employment tax returns.
Soon after its formation, Jefferson Bronze began what
would become a long period of financial difficulties. Early on,
in 1983, Letterman fired Mayer, and he and Vinick then acquired
Mayer's share of the corporation, obtained his release from
liability on the SBA loan, and each became a half owner of
Jefferson Bronze. Subsequently, Vinick asked Ronald Ouellette,
who had worked in the foundry under Leach, to take over as the
new manager.
Ouellette ran the office and the foundry, and his wife
Diane Ouellette worked part time as the bookkeeper in the office
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and signed the company checks and payroll returns. Vinick
occasionally would visit the Ouellette home to collect
information needed to complete the quarterly returns. After
their preparation, Vinick would return the completed, unsigned
forms to the Ouellette home. Usually once a month, Vinick would
discuss with Ron Ouellette the financial condition of the
corporation and would stress to him the need to pay the taxes.
During Ouellette's tenure as manager, Jefferson
Bronze's financial troubles continued. Often, the corporation
failed timely to pay the withholding taxes due. Regardless, the
corporation always filed its tax returns on time. At some
point, Letterman and Vinick obtained from Leach a $35,000 loan,
which they secured with personal guarantees. In 1985, Vinick
negotiated with an IRS revenue officer a payment plan for the
taxes Jefferson Bronze owed. Vinick relayed to Ouellette the
terms of the plan, and Ouellette complied with the plan's
requirements. After Jefferson Bronze completed payment of these
taxes, it experienced no further tax delinquency until Letterman
took over as manager.
In January 1988, Letterman decided on his own to take
over as the day-to-day financial manager of the corporation.
Letterman moved his law practice to Jefferson Bronze's office
and relieved Ouellette of his financial responsibilities, but
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retained him as the foundry manager. Letterman's wife, Ellen
Letterman, took over as office manager and bookkeeper. Vinick
continued to collect the financial information, to prepare the
tax returns, and to leave them for Letterman to sign. While he
also continued to advise Letterman to pay the corporation's
taxes, the record is undisputed that Vinick became less involved
in the financial affairs of the corporation as Letterman's role
increased.
In May 1988, Jefferson Bronze refinanced its SBA loan
with a $300,000 loan from National Grand Bank. Letterman and
Vinick met with the bank's vice president, Eliot Rothwell, who
negotiated the loan. The bank's practice required all
principals of any closely held corporation to be account
signatories, and it made no exception for Jefferson Bronze.
Letterman and Vinick each signed the note evidencing the loan
twice, once in an individual capacity and once in a corporate
capacity. Each further personally guaranteed the loan by
pledging his house as collateral. Around March 1989, the
corporation became delinquent on its loan from National Grand
Bank, and Letterman and Vinick met with Rothwell to discuss the
financial future of Jefferson Bronze.
By July of 1990, the company's continuing financial
difficulties forced it to file for bankruptcy protection under
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Chapter 11. After doing so, it opened two new bank accounts at
Heritage Cooperative Bank (“Heritage”): a debtor in possession
account and a tax account. Both accounts required two
signatures, Letterman's and Vinick's, on every check, even
though Letterman retained possession of the checkbooks. For the
first time in Jefferson Bronze's existence, Vinick's signature
appeared on Jefferson Bronze checks.
In 1990, during the bankruptcy period, Vinick signed
every check on the Heritage accounts, but it is unclear when he
signed them. On several occasions, Juli Young, the bank
employee who filed all paid checks, called Vinick down to the
bank. Upon arrival, she presented to him for his signature
checks that the bank already had negotiated with only
Letterman's signature.2 On July 26, 1991, National Grand Bank
foreclosed on its loan. Later that year, Jefferson Bronze
finally closed its doors.
2These checks were the subject of much dispute during the
trial because testimony about whether Vinick signed the checks
before or after the bank negotiated them was conflicting.
Vinick testified that he signed all checks after the bank had
negotiated them, but bank employees recalled that the bank had
negotiated some of the checks with Vinick's signature already
affixed. The district court did not resolve this dispute; the
judge merely stated that Vinick had signed some before and some
after negotiation, and further found the fact of Vinick's
signing, regardless of when, to be indicative of his authority
and responsibility within the meaning of § 6672.
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Meantime, from April 1989 to June 1990, during
Letterman's tenure as manager and prior to Vinick's ever having
signed a company check, Jefferson Bronze again fell behind in
its withholding tax obligations. On December 17, 1990, the IRS
assessed against Vinick a penalty pursuant to § 6672 for the
total amount owed, $49,129. The assessment alleged failed
withholding payments for the last three quarters of 1989 and the
first two quarters of 1990. On December 24, 1990, the IRS made
a like assessment against Letterman.
Vinick paid $3,731 and filed a claim for a refund. The
IRS denied that claim, and Vinick commenced this suit. The
government counterclaimed for the balance due and moved for
summary judgment against both men. The district court concluded
that as a matter of law Letterman and Vinick both were
responsible persons who acted willfully under § 6672. The court
thus granted the government's motion for summary judgment.
Vinick alone appealed. In Vinick I, we found a genuine issue of
material fact as to whether Vinick was a responsible person and
remanded for a bench trial on the issue that is the subject of
this appeal.
During a two-day bench trial to determine whether
Vinick was a responsible person, the court heard testimony from
several witnesses about the company's organizational structure
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and about the financial operations at Jefferson Bronze. That
testimony covered the formation of the corporation, the various
management changes, the operation of the company under each
manager, its financial difficulties, and its bankruptcy. The
court received into evidence over Vinick's objection over 200
canceled checks from the two Heritage accounts, which Jefferson
Bronze had opened after the relevant quarters.
After the second day of testimony, the court issued a
bench opinion, finding by a preponderance of the evidence3 that
Vinick was a responsible person within the meaning of § 6672.
The court found that he was the treasurer, prepared the
quarterly tax returns, negotiated with the IRS on behalf of the
corporation, pledged personal assets, had authority to
participate in employment decisions, and possessed throughout
the corporation's existence check-signing authority. The court
also found that he actually exercised this authority only while
the corporation was in bankruptcy. The court weighed each of
these factors to varying degrees in favor of his being a
3
The district court noted upon rendering its findings and
judgment that because the standard of proof is by a
preponderance of the evidence, it is immaterial which side has
the burden of proof. We have held that “[a]lthough the rule
appears harsh, as in other tax litigation a person who
challenges a section 6672 assessment bears the burden of
persuasion to prove lack of control.” Caterino, 794 F.2d at 5.
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responsible person. The court did find him to be uninvolved in
the day-to-day management of the corporation and weighed this
factor against his being a responsible person, noting, however,
that its weight was minimal. Vinick now appeals.
II.
In reviewing factual findings, this court applies the
clear-error standard of review. See Fed. R. Civ. P. 52(a).
Under this standard, we accept the district court's findings of
fact unless we are “'left with the definite and firm conviction
that a mistake has been committed.'” Anderson v. City of
Bessemer City, 470 U.S. 564, 573 (1985) (quoting United States
v. United States Gypsum Co., 333 U.S. 364, 395 (1948)); see also
Brown Daltas & Assoc., Inc. v. General Accident Ins. Co., 48
F.3d 30, 36 (1st Cir. 1995). Moreover, we usually defer to a
trial court's resolution of mixed questions of law and fact.
See, e.g., United States v. Howard (In re Extradition of
Howard), 996 F.2d 1320, 1328 (1st Cir. 1993) (“The standard of
review applicable to mixed questions usually depends upon where
they fall along the degree-of-deference continuum: the more
fact-dominated the question, the more likely it is that the
trier's resolution of it will be accepted unless shown to be
clearly erroneous.”).
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But, the case for deference vanishes when a court's
ultimate conclusion is infected by legal error. See Inwood
Labs. v. Ives Labs., 456 U.S. 844, 855 n.15 (1982) (“Of course,
if the trial court bases its findings upon a mistaken impression
of applicable legal principles, the reviewing court is not bound
by the clearly erroneous standard.”); Brown Daltas, 48 F.3d at
36 (same); Cumpiano v. Banco Santander Puerto Rico, 902 F.2d
148, 153 (1st Cir. 1990) (“It is settled that one way around the
rigors of the 'clearly erroneous' rule is to show that the trial
court mistook the applicable law.”). As a result, when a trial
court “premise[s] its ultimate finding . . . on an erroneous
interpretation of the standard to be applied,” we do not use
clear-error review. United States v. Parke, Davis & Co., 362
U.S. 29, 44 (1960). Instead, we treat the trial court's
conclusion as a question of law. See United States v. Singer
Mfg. Co., 374 U.S. 174, 194 n.9 (1963) (“Insofar as that
conclusion derived from the court's application of an improper
standard to the facts, it may be corrected as a matter of
law.”); Parke, Davis, 362 U.S. at 44 (noting that in these
circumstances, the appeals court is “reviewing a question of
law, namely, whether the District Court applied the proper
standard to essentially undisputed facts”); Bergersen v.
Commissioner, 109 F.3d 56, 61 (1st Cir. 1997) (noting that with
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mixed questions of law and fact “once the raw facts are
determined (and such determinations are normally reviewed only
for clear error), deciding which legal label to apply to those
facts is a normative decision--strictly speaking, a legal
issue”).
Because the trial court made its findings of fact based
on a misunderstanding of the legal standard for what constitutes
a responsible person under § 6672 in that it considered Vinick's
conduct over the entire period he was involved with Jefferson
Bronze rather than his activities during the quarters in
question, see infra Part III.B, we do not defer to its
conclusion that Vinick was a responsible party within the
meaning of the statute.4
III.
A.
A responsible person5 under § 6672 is anyone within a
company who has a duty to collect, account for, or pay the
4 The dissent argues that we have altered the standard of
review applicable to § 6672 cases as set forth in Caterino. We
have not. We agree that this court ordinarily should review the
trial court's responsible person determination for clear error;
however, when the fact-finder misunderstands the applicable
legal standards, the case for deference disappears.
5This term does not appear in the statute itself, but courts
long have referred to the persons subject to liability under
§ 6672 as “responsible persons.” See, e.g., Slodov v. United
States, 436 U.S. 238, 245 n.7 (1978).
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withheld taxes.6 See Vinick I, 110 F.3d at 172. In determining
who falls within the category of responsible person, the courts
have identified seven typically used, but nonexclusive, indicia.
The inquiry focuses on 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.
Fiataruolo v. United States, 8 F.3d 930, 939 (2d Cir. 1993);
accord Barnett v. IRS, 988 F.2d 1449, 1455 (5th Cir. 1993);
Denbo v. United States, 988 F.2d 1029, 1032 (10th Cir. 1993);
Brounstein v. United States, 979 F.2d 952, 954-55 (3d Cir.
1992); Thomsen v. United States, 887 F.2d 12, 16 (1st Cir.
1989); Gephart v. United States, 818 F.2d 469, 473 (6th Cir.
1987). No single factor is determinative of responsibility.
See Barnett, 988 F.2d at 1455. The deciding court must look at
6While the Code defines a responsible person as one who is
“required to collect, truthfully account for, and pay over any
tax,” 26 U.S.C. § 6672(a) (1994), 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
(concluding that Congress meant this phrase “to limit § 6672 to
persons responsible for collection of third-party taxes and not
to limit it to those persons in a position to perform all three
of the enumerated duties”).
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the “totality of the circumstances” when making the
determination of responsibility. Fiataruolo, 8 F.3d at 939
(“The question of control over the employer's finances must be
answered in light of the totality of the circumstances; no one
factor is determinative.”).
Because the goal of the statute is to hold liable for
the nonpayment of withholding taxes the party responsible for
such payment, 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.” Barnett, 988 F.2d at 1454;
see also Raba v. United States, 977 F.2d 941, 943 (5th Cir.
1992) (“The crucial examination is whether a person had the
effective power to pay taxes.” (internal quotation marks and
citation omitted)). While these factors largely are self-
explanatory, it is important to elaborate upon them to resolve
whether Vinick was a responsible person in light of the facts as
found. The factors easily divide into the following three
groups: (1) those that identify the taxpayer's status within the
corporation, (2) those that identify his involvement in the
daily affairs of the corporation, and (3) those that identify
his involvement in the financial affairs of the corporation. We
turn now to each of these groups.
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1.
The first two factors contemplate the taxpayer's status
within the corporate structure. As an initial matter, we note
that titular authority is insufficient to create liability. See
Caterino, 794 F.2d at 5 (noting that courts “have fashioned an
elastic definition predicated upon the function of an individual
in the employer's business, not the level of the office held”);
see also Fiataruolo, 8 F.3d at 939 (“[T]he significant control
test is not meant to ensnare those who have merely technical
authority or titular designation.”). Moreover, “[t]he requisite
exercised authority or duty is particularly lacking in a case
. . . where the taxpayer assumes a title merely for the purpose
of protecting his investment.” O'Connor v. United States, 956
F.2d 48, 51-52 (4th Cir. 1992).
Like corporate title, share ownership is a factor, but
not all shareholders are responsible persons. See id. (“To
ignore [the separation of ownership and authority] would be to
envelop within 'responsible person' all significant investors
with titles in corporations which fail to pay their withholding
taxes.”). Furthermore, share ownership is not a predicate to
finding responsibility. See Donelan Phelps & Co. v. United
States, 876 F.2d 1373, 1376 (8th Cir. 1989) (noting that a
responsible person “need not be an officer or director or
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shareholder or employee or disbursing officer or payroll clerk
of the trustee of the funds deducted from the employees'
wages”).
2.
The next two factors focus on the taxpayer's
involvement in the operation of the corporation. The first
factor is whether the taxpayer is active in the day-to-day
affairs of the company. Day-to-day management in a corporation
involves more than simply having some tangential involvement in
the corporation's business. See Godfrey v. United States, 748
F.2d 1568, 1575 (Fed. Cir. 1984). The Godfrey court described
what day-to-day management means:
[The taxpayer] actively conducted the day-
to-day operations of the business: he came
to the office daily, hired and laid off
employees, ordered materials and supplies,
conducted business correspondence, set the
price of jobs, negotiated all contracts with
customers, prepared invoices, disbursed
corporate checks signed by him and the
secretary-treasurer in payment of supplier's
[sic] bills and other business expenses, and
deposited the business receipts in the
corporation's bank account. His address was
used for receiving most business mail; his
signature was required on all corporate
checks.
Id. (describing activities of the taxpayer in White v. United
States, 372 F.2d 513 (Ct. Cl. 1967)). Given the depth of
involvement required for day-to-day management, occasional
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involvement in business affairs is insufficient to create
liability. See id. at 1575-76.
The next factor is whether the taxpayer has the ability
to hire and fire the employees. In essence, this factor assists
in determining the taxpayer's level of involvement in the daily
operations of the company. Cf. Thibodeau v. United States, 828
F.2d 1499, 1504 (11th Cir. 1987) (“The government claims that,
as president, the taxpayer was responsible for running the
corporation on a daily basis, including the hiring and firing of
all employees.”); White, 372 F.2d at 515 (listing with his other
daily operational duties the taxpayer's responsibility for
hiring and firing all employees). The theory is that a person
with authority to hire and fire the employees likely is involved
substantially in the day-to-day management of the company.
3.
The final three factors assess involvement in the
financial operations of the corporation. This inquiry is the
heart of the matter because it identifies most readily the
person who could have paid the taxes, but chose not to do so.
See Morgan v. United States, 937 F.2d 281, 284 (5th Cir. 1991)
(“The central question is whether an individual had the
effective power to pay taxes.”); Hochstein v. United States, 900
F.2d 543, 547 (2d Cir. 1990) (“The central question, however, is
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whether the individual has significant control over the
enterprise's finances.”). Of the three factors within this
central question, the first, whether the taxpayer has decision-
making authority, is the most important because the goal of
§ 6672 is to fix liability on those persons who could have and
should have remitted taxes to the IRS. See Caterino, 794 F.2d
at 5 (noting that the inquiry for responsibility is “whether the
person had the power to determine whether the taxes should be
remitted or paid or had the final word as to what bills should
or should not be paid and when” (internal quotation marks and
citation omitted)); see also Greenberg v. United States, 46 F.3d
239, 243 (3d Cir. 1994) (finding responsible a taxpayer who
“wrote checks to pay other creditors while knowing that
withholding tax liabilities to the United States remained
unpaid”); Denbo, 988 F.2d at 1032 (“[A] corporate officer or
employee is responsible if he or she has significant, though not
necessarily exclusive, authority in the general management and
fiscal decisionmaking of the corporation.” (internal quotation
marks and citation omitted)); Gephart, 818 F.2d at 473 (noting
that the test focuses “upon 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”); Commonwealth Nat'l Bank v.
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United States, 665 F.2d 743, 757 (5th Cir. 1982) (“A responsible
person is one who has a final or significant--even if not
exclusive--word as to which bills or creditors should be
paid.”); White, 372 F.2d at 517 (noting that a responsible
person usually is one “with ultimate authority over expenditures
of funds since such a person can fairly be said to be
responsible for the corporation's failure to pay over its
taxes”; one with “authority to direct [the] payment of
creditors”).
The second of these factors, whether the taxpayer
exercised control over the daily bank accounts, is significant
because it distinguishes between the officers with general
control and those with financial control. See Hochstein, 900
F.2d at 547 (“[T]he district court incorrectly focused on
[taxpayer's] control over [the company's] operations generally,
rather than his control over the finances of the corporation.”).
Financial involvement indicates that the taxpayer not only was
involved in the daily management of the company, but also knew
the financial circumstances and could have paid the government.
The final factor is whether the taxpayer had check-
signing authority. Again, this factor is significant because it
helps determine whether the taxpayer actually could have paid
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the IRS the due taxes. Importantly, “[c]ase law discloses that
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 100 percent penalty under section 6672.”
Barrett v. United States, 580 F.2d 449, 453 (Ct. Cl. 1978). The
check-signing inquiry goes beyond the simple question whether
the taxpayer was a signatory; rather, the court must look at the
check-signing authority in the context of financial control.
See United States v. Carrigan, 31 F.3d 130, 134 (3d Cir. 1994)
(noting that a president's having and even exercising on
occasion signatory authority, without more involvement in the
company's financial affairs, does not as a matter of law make
him a responsible person). Possession of the authority without
its exercise is not enough. See O'Connor, 956 F.2d at 51 (“The
substance of the circumstances must be such that the officer
exercises and uses his authority over financial affairs or
general management, or is under a duty to do so, before that
officer can be deemed to be a responsible person.”); Morgan, 937
F.2d at 284-85 (“Mere access to corporate funds, however, does
not make one a responsible person.”); Pototzky v. United States,
8 Cl. Ct. 308, 316 (1985) (holding that a corporate officer who
no longer exercised his authority as a signatory even though he
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“technically had the authority to sign” was not a responsible
person).
Having established the background and having explained
the operation of the indicia of responsibility, we turn to
discuss this particular case.
B.
As previously mentioned, our task is not to determine
whether the district court's factual findings were correct given
the weight of the evidence on each factual dispute involved.
Rather, the issue is whether Vinick's level of corporate
involvement suffices to render him a responsible person under
§ 6672. Therefore, our task is to decide whether the district
court understood the legal standard for what is required to be
a responsible person and correctly applied this legal standard
to its findings when making its ultimate conclusion. We hold it
did not and that it should have entered judgment for Vinick.
See Colwell v. Suffolk County Police Dep't, 158 F.3d 635, 647
(2d Cir. 1998) (remanding with instructions to enter judgment
for the appellee when there was insufficient evidence to support
the district court's judgment and no further proceedings were
required).
As we have discussed, the central question in
determining whether a taxpayer is a responsible person is
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whether he had the power to pay the taxes during the quarters in
question. See Barnett, 988 F.2d at 1454. In Vinick I, we
limited the inquiry of responsibility to “the relevant
quarters.”7 Vinick I, 110 F.3d at 172 (focusing attention on the
relevant quarters and noting that while Vinick participated in
some business activities, “neither of those incidents occurred
during the quarters in question”). At oral argument, the
government contended that evidence of activities outside the
quarters in question bears on whether Vinick had authority
during the quarters in question. We disagree. Responsibility
during one period does not equate to responsibility in all
periods. See Caterino, 794 F.2d at 4 (finding that the
taxpayer's “involvement with [the company] was insufficient to
make him 'responsible' for 1973 under section 6672, but was
sufficient to make him 'responsible' for the first two quarters
7A review of the district court's Findings and Conclusions
is troubling because of its reliance on Vinick's activities
outside the quarters in question. Indeed, it leaves us with the
impression that the court relied almost entirely on Vinick's
activities before and after the relevant quarters. Twice in
Vinick I we emphasized that an inquiry into liability under
§ 6672 should focus on the taxpayer's activities during the
quarters in question, see Vinick I, 110 F.3d at 172 (dismissing
findings that Vinick engaged in managerial activities because
they did not occur during the quarters in question), and we
reiterate that principle here. When determining whether a
taxpayer is a responsible person under § 6672, the court should
focus its inquiry on the quarters during which the taxes were
unpaid.
-24-
of 1974"). As we review the record, we can identify several
distinct eras of corporate governance. The first followed
Letterman's, Mayer's, and Vinick's initial purchase of Jefferson
Bronze, during which time, 1981 to 1983, Mayer was the day-to-
day manager. The second came with Ouellette's tenure as day-to-
day manager, which was from 1983 to 1987. The third, which
includes the quarters in question, began with Letterman's taking
over the daily operations in 1987 and ended when the company
filed for bankruptcy in July 1990. The final period began with
the filing of bankruptcy, during which time the company had
opened the Heritage accounts, and ended with the company's
failure in 1991. The latter two phases were particularly
significant. Letterman's management of the business was more
concentrated in his hands than it had been in those of his
predecessors. Moreover, when Jefferson Bronze filed for
bankruptcy, not only was Letterman's control a factor, but also
the bankruptcy court's oversight into the company's affairs
would bear upon the degree of control that either Letterman or
Vinick could have had. Because of the differences in the
governance of Jefferson Bronze, it is erroneous to conflate
responsibility during one era with responsibility during
another.
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All the factors involved in making the legal
determination of responsibility are designed to focus attention
on the central question of power. At no time did Vinick
exercise any decision-making authority over which creditors
Jefferson Bronze paid. Moreover, the government's evidence
indicates that during the quarters in question, Letterman was in
charge of the day-to-day operations. While it is true that more
than one person can be responsible, see Harrington, 504 F.2d at
1312 (noting that we hold responsible “all with responsibility
and authority to avoid the default which constitutes a violation
of the statute”), the government introduced no evidence
indicating that during the relevant quarters, Vinick had any
involvement in the day-to-day operations. Unless titular
authority, being a shareholder, and having unexercised check-
signing authority suffice to render a taxpayer responsible, no
evidence supports holding Vinick as such.
It is with these observations that we discuss the
district court's legal conclusions about Vinick's
responsibility.
Initially, the court found that Vinick was the
corporation's treasurer. In commenting that the fact of title
is determinative, the court concluded that position alone favors
finding Vinick to be a responsible person. Here, the district
-26-
court contravened the message of Vinick I, in which we said that
we “predicate our definition of who is a responsible person on
the function of the employee in the business, and not the level
of the office held.” Vinick I, 110 F.3d at 172; see also
Caterino, 794 F.2d at 5 (noting that courts consider a person's
actual office function rather than his title); White, 372 F.2d
at 516 (“[T]he courts tend to disregard the mechanical functions
of the various corporate officers and instead emphasize where
the ultimate authority for the decision not to pay the tax
lies.”). The court then compounded its error by determining
that being treasurer “gives him authority to do many things that
he does not necessarily have the responsibility to do.” Instead
of focusing on his unexercised authority and his titular
designation, the court should have looked at the substance of
-27-
Vinick's work as treasurer8 to determine what bearing on
responsibility this titular authority should have.
The government contended at oral argument that simply
being an inside director is sufficient to make a person
responsible because directors owe the company a fiduciary duty
to see to it that the taxes are paid. This position is contrary
to the caselaw. See O'Connor, 956 F.2d at 51-52; Godfrey, 748
F.2d at 1576. In O'Connor, the taxpayer was a fifty-percent
shareholder, the vice-president, and a director of a closely
held corporation, but did not exercise any authority. See
O'Connor, 956 F.2d at 51. The court held that, even though he
8Vinick's acting “as treasurer” is important because he was
and is a Certified Public Accountant (“CPA”). The district
court determined that his activities over the years of the
company's existence in preparing the taxes, meeting with the IRS
to negotiate the settlement in the early years, preparing the
quarterly employment tax returns, and recommending that the
withholding taxes be paid were activities within his capacity as
treasurer. These activities are also those that a professional
CPA would undertake to service his client. Indeed, Ellen
Letterman, in her testimony, discussed her relationship with
Vinick: “Well, he was the CPA and I would give him all the money
information he needed.”
The government has suggested that Vinick's telling Letterman
and the other managers to pay the taxes demonstrates his
responsibility. Giving this advice is, after all, typically a
part of the CPA's or attorney's function. But this advice
coupled with an investment interest and a corporate title is
insufficient to render that professional a responsible person
because it does not demonstrate an ability to decide which
creditors are paid. If anything, the rendering of advice would
support a determination of willfulness, but that inquiry begins
only after the determination of responsibility is made. See
Vinick I, 110 F.3d at 170.
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was a director, “O'Connor was a 'silent' investor who did not
exercise authority and was under no duty to do so.” Id.
Similarly, in Godfrey, the taxpayer was the chairman of the
board, had taken the lead in attempting to avoid insolvency, had
negotiated for loans, had sold corporate assets, and otherwise
had participated in the daily operations of the business. See
Godfrey, 748 F.2d at 1576. In deeming these activities
insufficient to render him a responsible person, the Federal
Circuit noted that “[t]o hold Godfrey a 'responsible person' on
the present record would be to hold as a 'responsible person'
every board chairman who took an active interest in the solvency
of the corporation he serves.” Id.
The district court also determined that Vinick's having
check-signing authority weighed heavily in favor of finding
responsibility. The court's affording such weight to the check-
signing factor without regard to whether check-signing authority
was indicative of financial control is contrary to § 6672
precedent. Cf. Denbo, 988 F.2d at 1032 (finding a taxpayer with
check-signing authority responsible because of his regular
involvement in the financial management of the corporation). In
other words, whether the taxpayer had check-signing authority is
relevant, but only insofar as it demonstrates financial control.
The central inquiry is whether Vinick could have paid the taxes.
-29-
See Morgan, 937 F.2d at 284; White, 372 F.2d at 517. While it
is true that he had check-signing authority during the quarters
in question, he at no time had access to the checkbook during
that period, see Vinick I, 110 F.3d at 172, and thus he was not
in a position to exercise his authority, which is determinative.
See Carrigan, 31 F.3d at 134 (noting that the taxpayer's check-
signing authority did not render him a responsible person
because “the corporate books, records and checkbooks were locked
in an office, and [the taxpayer] did not have his own key”);
Dudley v. United States, 428 F.2d 1196, 1202 (9th Cir. 1970)
(noting that the taxpayer “did not have control over the payment
of checks,” which indicated his lack of control over the
finances of the corporation).
The court ignored Vinick I's instructions to focus on
the quarters in question and admitted much evidence about
Vinick's signing of checks post Chapter 11, weighing that fact
heavily in favor of finding responsibility. This evidence does
not bear on the inquiry into responsibility during the relevant
quarters. See Vinick I, 110 F.3d at 172-73. Even if it were
appropriate to consider evidence from later quarters, the
intervention of the Chapter 11 proceeding significantly changed
this equation. Vinick's role, limited before the bankruptcy,
was only slightly more active after it. The fact of the
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bankruptcy renders meaningless any comparison of these two
periods. To the extent the district court considered the
evidence of Vinick's signing checks after the quarters in
question, it erred.
Assuming arguendo that Vinick's signing the Heritage
checks had some relevance, being a countersignatory does not
suffice to make him a responsible person. See Lee v. United
States, 89-2 U.S. Tax Cas. (CCH) ¶ 9393, at 89,018 (D. Haw. Apr.
26, 1989) (noting that even though the taxpayer “had the
authority to countersign checks . . ., she did not have any
authority to decide which creditors were to be paid” and thus
was not a responsible person); Montana v. United States, 76-1
U.S. Tax Cas. (CCH) ¶ 9145, at 83,159 (D. Neb. Nov. 18, 1975)
(noting that in cases finding countersignatories to be
responsible persons, “the taxpayer's power to sign checks was
merely a manifestation of his control over the management and
disbursement of corporate funds”); Last v. United States, 65-1
U.S. Tax Cas. (CCH) ¶ 9244, at 94,926 (E.D.N.Y. Feb. 9, 1965)
(finding the taxpayers not to be responsible persons even though
they “continue[d] to countersign checks” during the period in
question).
The court found that Vinick's previous negotiation with
the IRS and interaction with financial institutions weighed in
-31-
favor of responsibility. Again, the district court should not
have relied on this evidence because Vinick did not engage in
these activities during the quarters in question. See Vinick I,
110 F.3d at 172. And even in the case of the IRS settlement, it
was the manager, not Vinick, who saw to the fulfillment of its
terms. As the government noted in its brief, “[a]fter these
taxes were paid, there was no further delinquency during
Ouellette's tenure.” It is at this point that Letterman took
over management, and Vinick's role, already slight, became
minimal.9
The district court weighed in favor of responsibility
Vinick's investment in the corporation.10 This finding does not
fit within the typical litany of § 6672 factors, see Thomsen,
887 F.2d at 16, and is not relevant. While making a personal
9
A person's decision to become involved in loans and
refinancing but not in the payment of taxes can demonstrate
willfulness, which is the second prong of the § 6672 inquiry,
but does not demonstrate responsibility. See Caterino, 794 F.2d
at 6 (“Any responsible person who knows the taxes are not paid
and allows the business to pay other creditors acts willfully.”
(emphasis added)). For example, in Godfrey, the taxpayer took
an active interest in the company's solvency, but not in the
payment of taxes. The court correctly noted that his “knowledge
of nonpayment may be relevant to the issue of willfulness, but
it is irrelevant in considering the question of whether he was
a 'responsible person.'” Godfrey, 748 F.2d at 1576 (citation
omitted).
10
The court stated that the form of the personal
contribution, that is, whether he pledged personal assets or
made a personal guarantee to secure financing for Jefferson
Bronze, was irrelevant. It was the mere fact of contribution
that the court weighed in the responsibility calculus.
-32-
investment shows a level of involvement in the corporation, it
does not indicate financial control, and determining whether
Vinick has financial control is the aim of the § 6672 inquiry.
Because individual investors in corporations by definition use
their personal assets to make their investment, the court's
conclusion would render any investor in a closely held
corporation a responsible person. Because this finding does not
serve to limit the scope of who could be a responsible person,
it has no bearing on the § 6672 inquiry.
The district court found that Vinick had authority to
participate in the hiring and firing decisions at Jefferson
Bronze. The court weighed this factor in favor of his being a
responsible person and deemed it irrelevant that he never
actually exercised that authority. As discussed above, the
proper inquiry focuses on whether Vinick was involved in the
daily management of the corporation, which routine hiring and
firing of employees would indicate. The court did not find that
Vinick routinely made personnel decisions. The only finding is
that he had “authority to participate” in these decisions
regarding only the general manager. Again, such authority is
insufficient to render him a responsible person, see Godfrey,
748 F.2d at 1576 (noting that the taxpayer who “participated in
the hiring and firing of top corporate management” was not a
responsible person), because it does not demonstrate any
-33-
significant control over the daily operations, especially the
financial operations, of the corporation.
The final finding of the district court is that Vinick
had little involvement in the daily management of the
corporation. The court then gave this determination minimal
weight because it was “so far below the combined weight of the
[other] factors.” The court gave this finding short shrift in
contravention of accepted authority. See O'Connor, 956 F.2d at
51. At the heart of the question whether a taxpayer is a
responsible person lies an analysis of his influence and control
in the corporation and in its financial affairs. See id. That
Vinick did not have any involvement in the daily operation of
the corporation is much more significant than his title, for
example, because it demonstrates his inability to exercise any
degree of significant control over which creditors the company
would pay.
Taking all of these factors together, the findings of
the district court do not support the ultimate conclusion that
Vinick is a responsible person.11
11
The government notes that the Tenth Circuit's Denbo
decision has similar facts to those in this case. While it is
true the Tenth Circuit found there was sufficient evidence to
find Denbo a responsible person, see Denbo, 988 F.2d at 1033,
the case is distinguishable. Denbo was a fifty percent
shareholder, was the secretary-treasurer, was a director, did
not manage the restaurant's daily operations, pledged personal
assets for the corporation, arranged financing for the
corporation, and had check-signing authority, which he never
-34-
While Vinick may have been more than a mere passive
investor in the corporation, this fact alone is insufficient to
render him a responsible person. See Godfrey, 748 F.2d at 1576
(“Godfrey's activities were not those of a passive 'above the
fray' chairman, but they do not, without more, impose or create
the 'duty' expressly described in the statute.”). Absent a
finding that Vinick possessed actual, exercised authority over
the company's financial matters, including the duty and power to
determine which creditors to pay, as a matter of law he cannot
be a responsible person.
IV.
For the reasons stated, we find that Vinick as a matter
of law was not a responsible person within the meaning of 26
U.S.C. § 6672(a). We therefore reverse and remand the case to
exercised. See id. at 1032. He also “held regular meetings
with [his co-owner] and the accountants.” Id. As the Tenth
Circuit noted, “[Denbo's] financial involvement in the
corporation, along with his check-signing authority, gave him
the effective power to see to it that the taxes were paid.” Id.
at 1033.
In contrast, Vinick's role in the financial activities of
the corporation was largely as its accountant, unlike Denbo who
actively engaged in actual financial management of the
corporation. When Letterman became Jefferson Bronze's manager,
Vinick's role in the corporation substantially lessened.
Moreover, to the extent Vinick, as Jefferson Bronze's
accountant, was involved in the corporation's financial affairs,
such involvement demonstrates only his willfulness because it
shows he knew that on occasion the taxes had not been paid, but
does not demonstrate his power to pay them, which a
determination of responsibility requires.
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the district court with instructions to enter judgement in favor
of Vinick. Reversed and remanded.
Dissent follows.
-36-
LYNCH, Circuit Judge, dissenting. I dissent in this case,
despite great respect for my brethren, because I believe the
majority opinion is based upon significant errors of law.
A. Inconsistency With Prior Decision
In Vinick v. Commissioner, 110 F.3d 168 (1st Cir. 1997)
("Vinick I"), this court twice stated that the facts presented
in this case would permit a reasonable inference that Arnold W.
Vinick was a "responsible person" for purposes of 26 U.S.C.
§ 6672(a). We said that the record contained sufficient
evidence "from which one could infer Vinick’s responsibility as
a matter of fact." Id. at 173. We also noted, with regard to
evidence limited to the periods during which the taxes were not
paid, "[f]rom these indicia alone, one might infer that Vinick
was a responsible person." Id. at 172. Yet now, after the
trial judge has actually heard the same evidence, including
testimony from Vinick that was contradicted in material respects
by every other witness, the majority concludes that the trial
judge erred in determining that Vinick was a responsible person.
That alone is both passingly odd and at odds with the law of the
case doctrine.
B. Standard of Review
The majority empowers itself to reverse the district
court by treating the question of whether Vinick is a
"responsible person" as a question of law. But the standard of
-37-
review utilized by this court in § 6672 cases is review for
clear error. The majority says it is entitled to decide the
question de novo because the district court committed an error
of law. That error of law, according to the majority, is that
the district court "considered Vinick's conduct over the entire
period he was involved with Jefferson Bronze rather than his
activities during the quarters in question." There was no error
of law, as it was well within the district court's discretion to
admit this evidence and determine what weight to give it. There
is no reason to think the district court gave undue weight to
this evidence. Also, Vinick may not be heard to complain on
these grounds as he introduced much of the evidence in question
and did not object to the evidence the government introduced,
and so has waived this argument. Finally, there was no error,
much less clear error, in the district court's factual
determinations.
It is settled law in this circuit that a trier of
fact's determination of whether a taxpayer had sufficient
control over a corporation to be deemed a responsible person is
subject to clear error review. In Caterino v. United States,
794 F.2d 1 (1st Cir. 1986), we said,
This court cannot reverse merely because it
is convinced that it would have decided the
question differently; we must ascertain
whether the finding of fact is clearly
erroneous. We must affirm if the finding is
reasonably supported by the record as a
-38-
whole. We must reverse when a review of the
entire evidence leaves this court with the
definite and firm conviction that a mistake
has been committed.
Id. at 5 (internal quotation marks and citations omitted);
accord Harrington v. United States, 504 F.2d 1306, 1313 (1st
Cir. 1974) (affirming jury finding of responsibility "[s]ince
the jury could properly have found that [the taxpayer] was the
person with responsibility for the taxes"). We have viewed this
as a fact dominated determination and so give deference to the
trial judge. See Caterino, 794 F.2d at 6 ("We conclude that the
district court's finding that Caterino had sufficient power . .
. to control what creditors [the corporation] would pay is not
clearly erroneous. Therefore, its conclusion that Caterino is
'responsible' within the meaning of section 6672 is not
incorrect.").
The majority of circuits review the responsible person
determination for clear error as well. See Ghandour v. United
States, No. 97-5062, 1997 WL 716143, at *1 (Fed. Cir. Nov. 17,
1997) (unpublished); United States v. Jones, 33 F.3d 1137, 1139
(9th Cir. 1994); United States v. Running, 7 F.3d 1293, 1297
(7th Cir. 1993); Raba v. United States, 977 F.2d 941, 943 (5th
Cir. 1992); Donelan Phelps & Co. v. United States, 876 F.2d
1373, 1374 n.2 (8th Cir. 1989); Williams Indus. v. United
States, No. 87-2630, 1988 WL 92869, at *1 (4th Cir. Sept. 6,
1988) (unpublished); Sinder v. United States, 655 F.2d 729, 731
-39-
(6th Cir. 1981). Two circuits approach the issue differently.
See Bradshaw v. United States, 83 F.3d 1175, 1178 (10th Cir.
1995) (stating that determination of responsible person status
presents mixed question of law and fact, subject to de novo
review); United States v. McCombs, 30 F.3d 310, 319 (2d Cir.
1994) (reviewing findings regarding the taxpayer's role in the
company for clear error, but giving plenary review to conclusion
that taxpayer's role made her responsible under § 6672). In
addition, the other circuits have correctly viewed this court's
standard of review as being the clearly erroneous standard.
See, e.g., Bradshaw, 83 F.3d at 1178 n.4; Running, 7 F.3d at
1297; Hochstein v. United States, 900 F.2d 543, 546 (2d Cir
1990).
To support its departure from clear error review, the
majority cites to a number of Supreme Court and First Circuit
cases for the unremarkable proposition that a reviewing court is
not bound by the clearly erroneous standard where the trial
court has committed an error of law. In the two Supreme Court
cases and the First Circuit case cited by the majority in which
there was departure from the clear error standard of review, the
trial courts had committed obvious and important errors of law.
In United States v. Parke, Davis, & Co., 362 U.S. 29, 43-44
(1960), the trial court had erroneously found that the lack of
-40-
an express or implied agreement to suppress competition
precluded finding a violation of the Sherman Act. In United
States v. Singer Manufacturing Co., 374 U.S. 174, 193-95 (1963),
the trial court similarly misunderstood the nature of what would
suffice to constitute a violation of the Sherman Act. In Brown
Daltas & Associates, Inc. v. General Accident Insurance Company
of America, 48 F.3d 30, 37 (1st Cir. 1995), the trial court had
an erroneous view of which party bore the burden of proving a
material element in the case.1
The majority opinion is simply wrong when it says that
there was legal error on the part of the district court in this
case. The record demonstrates that the district court
understood both the nature of the inquiry into responsibility
under § 6672 and the factors that were relevant to this inquiry.2
1
Furthermore, Brown Daltas does not state that a reviewing
court should apply de novo review when a trial court's factual
finding has been affected by legal error. The language is more
modest, noting that in this situation a "reviewing court is not
bound by the clearly erroneous standard" and that the trial
court's findings should be "accorded diminished respect on
appeal." Brown Daltas, 48 F.3d at 36 (internal quotation marks
and citation omitted).
2The majority's departure from the clear error standard will
cause problems in a related area: the taxpayer's right to a jury
trial. Is the majority contending that a jury must be
instructed it cannot consider any evidence from outside the
period in question?
While the First Circuit has not specifically ruled on the
question of whether the Seventh Amendment right to a jury trial
obtains in proceedings in which the government seeks to recover
unpaid taxes, cases have routinely come to us after jury
-41-
C. Standards Guiding the Determination
The majority opinion is based upon errors of law both
as to the rules it states and as to the application of otherwise
correct rules. The majority thrice errs. First, the majority
opinion creates a new and erroneous legal rule: that evidence
from tax quarters outside of the quarters at issue may not be
considered. There is no support given for this new rule, and it
is contrary to the law. Second, the majority opinion pays lip
service to the rule that the burden of proof is on the taxpayer
and then ignores that principle. Third, the majority departs
from circuit precedent by moving from a flexible, multi-factored
approach to a single focus of decisive weight. Instead of
regarding the individual factors as elements contributing to an
overall picture of Vinick's status, the majority opinion notes
for each factor that weighs in favor of responsibility that such
an individual factor, alone, is insufficient to create
determinations of whether a party is a responsible person. Both
Thomsen v. United States, 887 F.2d 12, 13 (1st Cir. 1989)
(involving a § 6672 action), and Harrington involved appeals
from jury trials. We have applied clear error review to the
responsible person determination in both bench and jury trials.
Other circuits have addressed the question and have found
that the Seventh Amendment right to a jury trial does exist in
this situation. See United States v. McMahan, 569 F.2d 889, 892
(5th Cir. 1978) (holding right to jury trial exists in § 6672
recovery suit brought by government); cf. Damsky v. Zavatt, 289
F.2d 46, 51 (2d Cir. 1961) (holding, in part, that right to jury
trial exists in action by government to recover federal income
taxes).
-42-
responsibility. But factors do not stand alone, and the
district court correctly considered them in aggregate.
1. Consideration of Evidence from Outside the Tax Quarters at
Issue
The district court properly considered evidence from
outside of the quarters at issue so that it could determine
Vinick's status, authority, and control during the pertinent
quarters. No court, to my knowledge, has ever before held that
it is error for a trier of fact to admit evidence from quarters
other than the quarters during which the taxes were not paid and
then to consider what weight to give to this evidence.
The district court acted in accord with the Federal
Rules of Evidence in admitting evidence that has a tendency to
prove or disprove a material fact (and thus is relevant). See
Fed. R. Evid. 401-402. Courts regularly admit evidence of prior
or later transactions, occurrences, and statements to prove
material elements of cases. In corporate veil-piercing cases,
which are analogous to the present case, courts consider
evidence from outside of the period at issue to determine
whether the principal should be held personally liable to the
corporation's creditors. In Crane v. Green & Freedman Baking
Co., 134 F.3d 17 (1st Cir. 1998), a union benefits plan sought
to pierce the veil of a corporation to recover unpaid sums from
the corporation's principals. In reversing summary judgment for
-43-
the defendants, this court found "[p]articularly flagrant . . .
the evidence of a personal vacation that the [principals]
financed with corporate funds." Id. at 24. The court weighed
the evidence of this vacation, which took place in January 1991,
against the principals, even though the corporation failed to
make payments to the benefits plan more than a year later, in
April 1992. See id. at 20, 24. The court also considered
evidence of checks from the corporate account that were made to
the defendants beginning in January 1991. See id. at 24.
Similarly, in Pepsi-Cola Metropolitan Bottling Co. v. Checkers,
Inc., 754 F.2d 10, 16 (1st Cir. 1985) -- another veil piercing
case -- this court held that summaries of corporate checks made
to the defendants were admissible as proof of the lack of
separate corporate and individual identities even though the
checks were made after the debt sued upon had been incurred.
Courts consider this type of temporally removed
evidence in other situations as well. In fraud or
misrepresentation cases, "proof that the defendant perpetrated
similar deceptions frequently is received in evidence." 1
McCormick on Evidence § 197, at 695 (John W. Strong ed., 5th ed.
1999); see, e.g., Whittaker Corp. v. Execuair Corp., 736 F.2d
1341, 1347 (9th Cir. 1984). Also, "when the authority of an
agent is in question, other similar transactions that the agent
has carried out on behalf of the principal are freely admitted."
-44-
1 McCormick on Evidence § 198, at 698; see also 2 Wigmore on
Evidence § 377, at 392-93 (James H. Chadbourn rev. 1979).
In the context of prosecutions for conspiracy to
deceive immigration authorities through phony marriage
ceremonies, the Supreme Court has held that evidence from the
period after the conspiracy has ended is admissible to prove the
spuriousness of the marriage and the intent of the parties. See
Lutwak v. United States, 344 U.S. 604, 617 (1953). This court
has allowed admission of post-conspiracy evidence in a criminal
conspiracy case to prove the existence of the conspiracy and the
defendant's participation. See United States v. Fields, 871
F.2d 188, 197 (1st Cir. 1989).3
Finally, in torts cases, evidence from before or after
an accident has occurred is admissible for a number of purposes.
See, e.g., Espeaignnette v. Gene Tierney Co., 43 F.3d 1, 5-10
(1st Cir. 1994) (holding that district court abused its
3
Similarly, Federal Rule of Evidence 404(b) specifically
enumerates a list of purposes for which evidence of other
"crimes, wrongs, or acts" is admissible. See, e.g., United
States v. Tse, 135 F.3d 200, 208 & n.6 (1st Cir. 1998) (holding
that evidence of a subsequent crime was admissible to show that
defendant was "constantly trying to maintain his dominance" as
leader of a gang); United States v. Fulmer, 108 F.3d 1486, 1501-
02 (1st Cir. 1997) (holding that statements by defendant made
prior to conduct for which he was charged was admissible to
prove motive and intent); United States v. Spinosa, 982 F.2d
620, 628-29 (1st Cir. 1992) (holding that evidence of prior
possession of cocaine was admissible to prove knowledge and
intent); see generally 2 Weinstein's Federal Evidence § 404.20
(Joseph M. McLaughlin ed., 2d ed. 1999).
-45-
discretion in refusing to admit evidence of modification of saw
to prove feasibility in design defect case and holding that
evidence of lack of prior accidents was properly admitted to
prove absence of defect and lack of causation); Clausen v. Sea-
3, Inc., 21 F.3d 1181, 1189-92 (1st Cir. 1994) (holding that it
was not plain error for district court to admit evidence of
remedial measure taken three years after accident to prove
defendant's control over area in which accident occurred).
In this case, Vinick's exercise of authority outside
of the quarters in question sheds light upon the authority he
had during the quarters in question. That he helped negotiate
refinancing before the quarters in question suggests that he
would have done so during the quarters in question. That he
previously took steps to remedy the company's non-payment of
taxes is also relevant to his authority and control during the
pertinent quarters, as is the fact that he helped take the
company into and through bankruptcy proceedings. Such evidence
is relevant and, therefore, admissible. The trial court
correctly concluded that it could admit, in this bench trial,
evidence from outside the quarters in question, appropriately
adjusting the weight such evidence would be given. There was no
error.
Evidence from outside of the quarters in question
serves an especially important role where, as here, taxes were
-46-
not paid for a relatively short period. It could easily be the
case that a person with significant authority and control in a
company has no occasion to exercise that authority and control
during a short period -- for example, when no major decisions
need to be made and no significant events occur. Although this
may be purely a matter of luck, the majority opinion renders it
potentially impossible in this type of situation to find that a
person who actually has the authority to pay the taxes is a
responsible person.
Further, Vinick has waived the issue of the district
court's consideration of evidence from outside the quarters in
question. Where an appropriate, contemporaneous objection has
been made, this court reviews admissions of evidence for abuse
of discretion. See Varano v. Jabar, 197 F.3d 1, 4 (1st Cir.
1999). While Vinick made a motion in limine requesting that the
government's evidence be limited "to the periods at Issue in the
case at Bar," it was Vinick who introduced much of the evidence
from outside of the quarters in question and thus waived the
objection. See Gill v. Thomas, 83 F.3d 537, 541 (1st Cir.
1996). Moreover, Vinick never objected to the government's
introduction of such evidence. Therefore, review of the
district courts evidence determinations is for plain error. See
Varano, 197 F.3d at 4; Clausen, 21 F.3d at 1190.
-47-
Vinick testified on direct examination regarding his
involvement in hiring Ron Ouellette, signing Heritage Bank
checks, the initial $165,000 financing, the $300,000
refinancing, and Jefferson Bronze's bankruptcy. Vinick also
introduced evidence of Jefferson Bronze checks from before the
quarters in question -- checks that lacked his signature -- to
prove that he never exercised his check signing authority before
the bankruptcy. On cross-examination, Vinick was questioned
without objection regarding his negotiating a payment plan with
the IRS during Ouellette's tenure. Vinick called two employees
from Heritage Bank as witnesses and questioned them about the
checks he had signed after the quarters in question. Vinick
made no objection to the government's questioning of Elliot
Rothwell, a National Grand Bank employee, regarding Vinick's
involvement in the $300,000 refinancing. Vinick made no
objection to the government's questioning of Ouellette regarding
the frequency and amount of information Vinick received about
Jefferson Bronze during Ouellette's tenure. Vinick made no
objection to the government's questioning of Richard Letterman
as to Vinick's role in the original $165,000 financing and in
the $300,000 refinancing. Vinick made no objection to the
government's questioning of Letterman regarding Vinick's role in
-48-
negotiating with the IRS during Ouellette's tenure, Vinick's
involvement in hiring and firing decisions, and Vinick's
involvement in the company's bankruptcy. Nor did Vinick object
to the questioning of Letterman's wife regarding the frequency
and amount of information Vinick received during her husband's
tenure and the number of Heritage Bank checks Vinick signed.
It was not an abuse of discretion, much less plain
error, for the district court to admit this evidence, which
clearly had a tendency to prove Vinick's authority and control.
2. The Burden of Proof
As to the burden of proof, these cases usually involve
a company that has withheld taxes from employees' wages and has
then failed to pay the taxes to the government. In the
meantime, the company has typically used the withheld funds to
pay other creditors. Because the employees are held harmless
and credited with the amounts withheld, the U.S. taxpayer often
makes up the difference. In order to deter this behavior and
lessen the costs imposed on other taxpayers, Congress has
imposed a duty on persons whom the law deems responsible to
collect, account for, and pay the taxes. Thus, the question is
not who in the company ordinarily pays the taxes, but upon whom
the law imposes a duty to see that the taxes are paid.
-49-
In keeping with the social policy objectives of § 6672,
the burden of proof is on a taxpayer whom the IRS believes is a
responsible person to prove that he is not a responsible person.
See Caterino, 794 F.2d at 5. We have said that this may be a
harsh rule, see id., but it is designed to protect the
government and our nation's taxpayers from tax scofflaws, see
Harrington, 504 F.2d at 1311. The district court, not the
majority, has it right. Under the relevant tests, Vinick did
not carry his burden of proof to show that he was not a
responsible person.4
3. The Responsible Person Factors Should be Viewed in Aggregate
In keeping with the social policy objectives, "[c]ourts
have explicitly given the word 'responsible' a broad
interpretation." Caterino, 794 F.2d at 5. Since the term
"responsible" is far from self-defining, we have generally
looked to indicia of responsibility such as "the holding of
corporate office, control over financial affairs, the authority
to disburse corporate funds, stock ownership, and the ability to
hire and fire employees." Thomsen v. United States, 887 F.2d
12, 16 (1st Cir. 1989). This was the standard the district
court applied, and correctly so.
4
The majority opinion even suggests that it viewed the
burden of proof as the government's, stating that "the
government introduced no evidence indicating that during the
relevant quarters, Vinick had any involvement in the day-to-day
operations."
-50-
Until now, this court has never suggested that the
factors fell into an exclusive trinity or that the factor of
day-to-day decision-making authority over company operations was
the dispositive factor. The majority's suggestion that control
over the company's day-to-day affairs is central to the
responsible person determination conflicts with circuit
precedent. In Harrington, this court held there was "no error
in the court's charge [to the jury] that an individual need not
be in day to day control of the administrative and financial
aspects of the business in order to be [a] responsible person
within the meaning of Section 6672." Harrington, 504 F.2d at
1315.
The majority opinion also skews normal appellate
review, dismissing each factor pertaining to responsible person
status by saying that that factor alone cannot support a
responsible person determination. For example, the majority
opinion states: "titular authority is insufficient," "not all
shareholders are responsible persons," "occasional involvement
in business affairs is insufficient," "[p]ossession of [check
signing] authority . . . is not enough." But factors in
combination can describe sufficient authority or control to
render someone a responsible person.
D. Record Support for the Determination
-51-
This case comes to us after trial, and we are required
to draw all inferences from the evidence in favor of upholding
the verdict. See United States v. Ven-Fuel, Inc., 758 F.2d 741,
744-45 (1st Cir. 1985). Although the majority opinion
recognizes this principle, it does not follow it; it could not
do so and reach the result it does.
This picture emerges from the evidence: Vinick owned
half the company and was one of its incorporators. He was,
throughout, its treasurer and one of only two directors. During
the periods in question, there were only two corporate officers,
Vinick and Letterman. When Letterman, Vinick, and Peter Mayer
bought the company in 1981, Vinick agreed, both personally and
in his capacity as treasurer, to reimburse the former owner for
any taxes owed. Vinick signed the note and pledged his house as
security for the original financing of $165,000 with the Small
Business Administration ("SBA"). This gave him a strong
incentive to stay involved in what the company was doing, and
Vinick did keep abreast of the company's financial situation.
He prepared all of the tax returns, including returns when the
company lacked funds to pay the taxes. In order to prepare the
taxes, he was given regular information about income and
expenses. Indeed, throughout his relationship with the company
he received more information than that. He was regularly given
copies of the check registers and reviewed information on a
-52-
weekly basis from those actually operating the company. His
activities went beyond those of a mere accountant.5
Although the district court did not decide the issue,
Vinick appears to have played a significant role in hiring and
firing. In 1983, after the SBA complained to Vinick about
Mayer, the first operations manager, Vinick and Letterman
decided to remove Mayer. Vinick then asked Ouellette to run the
company. In 1988, when Ouellette had problems, Letterman moved
into the position, doing so with Vinick’s tacit approval.
In 1985, when the company could not pay its withholding
taxes, Vinick and Letterman (but not Ouellette, the company's
day-to-day manager) went to see the IRS, and Vinick worked out
a settlement agreement and payment schedule that Ouellette
followed. This effort belies the majority opinion's suggestion
that Vinick was merely a passive investor. The fact that Vinick
did not keep the checkbook or write the checks did not stop him
from exercising his authority to correct this problem with the
IRS, and there is nothing to indicate that, having exercised
this authority in 1985, he did not have such authority in 1989
and 1990.
Throughout, Vinick had check-signing authority. He
chose not to exercise any such authority until the company went
5
Vinick denied he acted as the company’s accountant; this
was contradicted by other witnesses.
-53-
into bankruptcy in mid-1990. If he had regularly signed checks,
the IRS would have had a stronger case. But that he chose not
to sign checks until later does not negate his authority to do
so during the quarters in question. Indeed, when he did
exercise check-signing authority during the bankruptcy period,
he even went to the bank to complain that it was letting checks
go through without his signature on them.
The quarters when the taxes were not paid were the last
three quarters of 1989 and the first two quarters of 1990. The
majority opinion asserts that there was a sea change in the
operations of the company during those quarters. That is not
so. It is true that Letterman took control of day-to-day
operations of the company in 1988, and his wife acted as the
bookkeeper. It is also true that Vinick then reduced his
involvement in the day-to-day operations. But it is not true
that he reduced his involvement in the financial affairs of the
company.
The majority opinion is simply incorrect when it states
that "the record is undisputed that Vinick became less involved
in the financial affairs of the corporation as Letterman's role
increased." When Ouellette ran the day-to-day operations,
Vinick discussed the company's financial condition with him "on
a monthly basis." In contrast, when Letterman ran the day-to-
day operations, Vinick reviewed the company's financial
-54-
condition at least weekly, and often more frequently. Letterman
testified that he and Vinick had weekly conversations about how
the company was doing, that Vinick saw the weekly receipts from
customers, and that Mrs. Letterman "brought him everything
[they] did." Mrs. Letterman testified that she brought Vinick
the company’s income and expense information at least weekly,
and more frequently at the end of the month. The judge was
entitled to accept the Lettermans' testimony over Vinick’s
contradictory testimony that he got such information at most
once a month. In fact, Richard Letterman testified that Vinick
was privy to all information about what was happening at all
times. Nor did Vinick's other financial activities lessen.
Just as before, Vinick prepared the tax returns and the profit
and loss statements. Just as before, he refused to sign the
returns and told others to do so.
When there were major decisions to be made, Vinick made
them together with Letterman. The two of them decided in mid-
July of 1990 that the company had to be put into bankruptcy.
Vinick went to the bankruptcy court, and he started signing
company checks that he had always had the authority to sign. At
trial, Vinick attempted to minimize his role in the running of
the company at this stage, but his testimony was contradicted by
others. For example, Vinick claimed he signed the vast majority
of checks only after they had been negotiated with only
-55-
Letterman's signature. Two bank officials and Letterman's wife
all said he signed most checks before negotiation.
But it is what happened during and around the quarters
in question that reinforces that the district court’s conclusion
was not error. The district court quite properly weighed in
Vinick’s favor the fact that he did not run the company day-to-
day. But it is also true that when the company ran into
financial problems, Vinick played a considerable role. In May
of 1988, the company secured a $300,000 loan from National Grand
Bank, refinancing its earlier $165,000 loan and obtaining
additional operating capital. Vinick and Letterman met with
Eliot Rothwell, a bank official, two or three times to secure
the loan. Rothwell found Vinick to be familiar with the
company’s financial condition. Vinick signed the loan
application and then signed the note both in his individual and
corporate capacities. Vinick and Letterman each personally
guaranteed the loan, and there is evidence that each pledged his
home. The bank encouraged them to open an account there for the
company; Vinick and Letterman were the signatories. Vinick said
there was a separate $300,000 loan from Bank of New England that
was made personally to him and to Letterman, that the money was
put into the company, and that he gave a mortgage on his home
for this loan. In any event, if the obligations to National
Grand Bank were not met, Vinick was personally in jeopardy. In
-56-
fact, Vinick's interest in being involved in the company's
financial affairs had now become even greater than it was
originally, as the amount for which he was personally liable had
almost doubled. This helps explain his weekly review of the
company's finances during Letterman's tenure.
In early 1989, just before it stopped paying its taxes,
the company became delinquent on the National Grand Bank loan.
Vinick and Letterman then met several times with Rothwell to try
to work out the problem. Again, Rothwell found Vinick
knowledgeable about the company’s financial affairs. Vinick was
well aware during this period that the company was not paying
the taxes withheld from employees. Vinick did not do what he
had done in 1985, which was to try to work out matters with the
IRS and negotiate a plan to pay the taxes owed. In essence, it
is fair to infer that he and Letterman together decided to treat
the IRS as a second-best creditor and put their efforts and the
company's payments toward the bank, to which they had immediate
personal liability. But that is not what the law permits. See
Donelan Phelps, 876 F.2d at 1377. The record amply supports a
finding that Vinick was a responsible person.
This is not a case, as the majority would have it, of
a passive investor unfairly being saddled with § 6672 liability.
Such investors do need protection, a fact that was amply
demonstrated by the government’s aggressive and overreaching
-57-
posture at oral argument. The evidence in this case, however,
showed that Vinick was not merely a passive investor. On the
evidence presented, Vinick could have been, and was, deemed a
responsible person. As such he had a duty to ensure that the
taxes were paid. Given the degree of his involvement and
control over financial and other matters in the company, Vinick
could not avoid that duty by refusing to write checks to the IRS
that he had the authority to write, by refusing to sign tax
returns that he had the authority to sign, and by failing to
meet with the IRS when he had the authority to do so.
E. Disposition on Appeal
Even if the majority opinion were correct in asserting
that the district court had a mistaken impression of applicable
legal principles, then the proper disposition would be to remand
the case to the district court, not to decide the case
ourselves. Where the evidence "does not compel a ruling for
either side," the proper course is to remand the case to the
trial court. TEC Eng. Corp. v. Budget Molders Supply, Inc., 82
F.3d 542, 545 (1st Cir. 1996). It cannot be said that the
record compels a finding that Vinick was not a responsible
person.
But for his dissembling at trial, there is a temptation
to feel sorry for Vinick. His investment in this small company
has led to a nightmare for him. Yet, it was not his investment
-58-
alone that led to his being a responsible person, nor was it
merely his title as treasurer. Crediting the entire record,
there was no error in the trial judge’s decision, and I dissent.
-59-
Vinick v. United States
Court: Court of Appeals for the First Circuit
Date filed: 2000-03-08
Citations: 205 F.3d 1, 205 F.3d 1, 205 F.3d 1
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