United States Court of Appeals
For the First Circuit
No. 02-1702
JOSEPH V. STUART,
Plaintiff, Appellant,
v.
UNITED STATES,
Defendant/Third-Party-Plaintiff, Appellee,
FRANKLIN O'DELL,
Third-Party Defendant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. George A. O'Toole, Jr., U.S. District Judge]
Before
Boudin, Chief Judge,
Torruella and Howard, Circuit Judges.
David E. Neitlich, for appellant.
Bethany B. Hauser, Attorney, Tax Division, Department of
Justice, with whom Eileen J. O'Connor, Assistant Attorney General
and Teresa E. McLaughlin, Attorney, were on brief, for appellee.
July 24, 2003
TORRUELLA, Circuit Judge. Plaintiff-appellant Joseph
Stuart ("Stuart" or "Taxpayer") brought suit in district court
seeking a refund of federal taxes and penalties he paid to the
Internal Revenue Service for the unpaid trust fund taxes of Buyers
Business Network ("BBN"). The district court granted partial
judgment in favor of the IRS with regard to the correctness of the
amounts of the assessments at issue. The remaining issue of
whether Stuart could be held liable for BBN's debt was then tried
to a jury, which rendered special verdicts finding for the IRS on
all counts. Stuart appeals. After careful consideration, we
affirm.
I. BACKGROUND
A. Entities at Issue
Stuart is an experienced businessman who held interests
in numerous operations, including dry cleaning, jewelry, insurance,
restaurant, and publishing businesses. In 1984, he semi-retired,
and in 1989, after he had a heart attack, he transferred his assets
to his wife.
In 1992, Stuart advised his family on the creation of
Maynard Mall Realty Trust ("MMRT") to purchase the physical plant
of the Maynard Mall in Massachusetts. Local building contractor
Thomas Sheridan was the trustee, with Sheridan and three of
Stuart's children as beneficiaries. Stuart also advised his wife
and children in forming Combined Financial, Inc., a corporation
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which held interests in a number of businesses located within the
Maynard Mall and provided financing for some of these businesses.
Stuart's son Greg was originally the president of Combined
Financial, but Stuart became president at some point before the end
of the fourth quarter in 1993, the first of the four quarters
involved in the suit.
BBN was a Maynard Mall tenant. BBN brokered the exchange
of goods and services between small and medium-sized businesses in
return for a commission. Franklin O'Dell, BBN's president,
previously operated a barter company called Bottomline Business
Exchange of New Hampshire ("BBX New Hampshire") with Ralph Butts.
Steve Lichtman and Kevin Dowd had been operating another barter
business in Medford and then at the Maynard Mall known as
Bottomline Business Exchange of Medford ("BBX Medford"). In
December, 1992, O'Dell and Butts agreed with Lichtman, Dowd, and
Combined Financial to consolidate BBX New Hampshire and BBX Medford
at the Maynard Mall as BBN, an 80 percent subsidiary of Combined
Financial. The four men owned equal shares of the remaining 20
percent.
In 1993, O'Dell learned that former BBX Medford had been
in serious financial trouble when it entered the merger, and he
told Stuart of the problem. O'Dell and Stuart held a meeting with
Lichtman and Dowd, and a new agreement was executed on March 5,
1993. Among other things, the new agreement eliminated Lichtman
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and Dowd from BBN ownership and authorized Combined Financial to
intervene in BBN's financial affairs under certain circumstances,
such as if BBN was fiscally imbalanced or mismanaged.
Stuart became a signatory on BBN's bank account on
November 22, 1993, at which time BBN owed Combined Financial over
$400,000. Two signatures were required on any check for more than
$250, and all ten checks Stuart signed for more than $250 were
countersigned by either O'Dell or Robert Minka, Combined
Financial's comptroller.
B. Assessments
BBN filed form 941 -- "Employer's Quarterly Federal Tax
Returns" -- for the fourth quarter of 1993 and the first quarter of
1994. These returns were signed by O'Dell as BBN's president. The
1993 return shows total wages paid of $67,745.49, with taxes due of
$16,551.04; the 1994 return shows total wages paid of $42,302.50,
with taxes due of $10,639.41. By 1997, unpaid balances of
assessment of trust fund taxes (payroll taxes) remained --
$11,597.97 for the fourth quarter of 1993 and $7,403.23 for the
first quarter of 1996. The IRS then made assessments of $19,001.20
against Stuart and O'Dell because the IRS found that they had
sufficient control over BBN's finances to be held personally
responsible for BBN's withholding tax liability under I.R.C. § 6672
(2000).
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BBN did not file a return for the second or third
quarters of 1994. For the missing quarters, the IRS used BBN's
past returns to prepare substitute returns under I.R.C. § 6020(b),
based on an estimated payroll of $42,492.91. The IRS then made
assessments of $23,498.58 against Stuart and O'Dell. The IRS
retained and applied against the assessments overpayment credits
which the IRS owed Stuart and O'Dell, resulting in the balance due
on the assessment being reduced to $730.94.
C. Litigation Below
The IRS denied Stuart's claim for a refund of the
penalties he paid to the IRS, leading Stuart to bring suit in
federal district court. The Government counterclaimed for the
balance of assessments due and impleaded O'Dell. At the close of
discovery, the Government moved for partial summary judgment
regarding the amounts assessed. Stuart also moved for summary
judgment, contending that the assessment for the second and third
quarters of 1994 was invalid because the amounts of the tax
liabilities for those quarters was estimated. In response, the
Government submitted Certificates of Assessments and Payments as
proof that the assessments were presumptively valid. The
Government also filed a motion in limine to exclude testimony of
IRS personnel regarding the validity of the substitute returns.
The district court denied Stuart's motion for summary
judgment and granted the Government's motion for partial summary
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judgment and its motion in limine. The issue of whether Stuart was
a responsible person who willfully failed to remit the trust fund
taxes to the IRS went to trial. The jury returned special verdicts
for the Government on all counts, finding Stuart both responsible
and willful as to all four tax quarters at issue. Stuart then
filed a motion for a new trial. The district court denied the
motion, and Stuart appeals.
II. CHALLENGE TO AMOUNTS ASSESSED
A. Standard of Review
We review the district court's legal interpretations de
novo; we "overturn its factual findings only if they are clearly
erroneous." Interex v. Comm'r, 321 F.3d 55, 58 (1st Cir. 2003).
B. Analysis
Stuart contends that the district court erred by favoring
IRS assessments with a presumption of correctness because the
underlying substitute returns were without factual foundation,
constructed based upon an irrational theory, unauthorized, and
facially inconsistent.
Stuart's argument is without legal support. The IRS
presented Certificates of Assessments and Payments for the fourth
quarter of 1993 and the first three quarters of 1994, which are
"presumptive proof of a valid assessment." Geiselman v. United
States, 961 F.2d 1, 6 (1st Cir. 1992) (per curiam). This
presumption places the burden of proof on Stuart to show that the
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IRS's determination is invalid. Helvering v. Taylor, 293 U.S. 507,
515 (1935); accord Interex v. Comm'r, 321 F.3d at 58. A
determination is invalid if it is "without rational foundation and
excessive." United States v. Janis, 428 U.S. 433, 441 (1976)
((finding that a naked assessment made without any foundation
cannot be used to calculate an assessment because it was "without
rational foundation and excessive and not properly subject to the
usual rule with respect to the burden of proof in tax cases")
(citations omitted)); accord Interex v. Comm'r, 321 F.3d at 58.
Stuart did not carry his burden. Instead of presenting
credible evidence that the assessments were without foundation,
Stuart asserts only that the assessments are without foundation
simply because they are based on substitute returns. However,
taxpayers have a duty to maintain adequate records for tax
reporting purposes. I.R.C. § 6001. Where a taxpayer fails to keep
such records, "the government, in attempting to establish a
violation of the income tax law, may reconstruct a taxpayer's
taxable base by any reasonable method." United States v. Morse,
491 F.2d 149, 151 (1st Cir. 1974); accord Cracchiola v. Comm'r, 643
F.2d 1383, 1385 (9th Cir. 1981); United States v. Firtel, 446 F.2d
1005, 1006-07 (5th Cir. 1971) (per curiam). Here, the substitute
returns were based upon a figure slightly lower than the payroll
figures submitted by BBN for the last quarters for which it did
file a return. Stuart argues that these amounts may be high
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because the payroll of a failing business may decline before the
business ceases all operations. Stuart's assertion may well be
correct, but he has not produced any records or other corroborating
evidence to show that this actually occurred at BBN. Consequently,
Stuart has failed to demonstrate that the Certificates of
Assessments and Payments were not reasonable.
III. ATTACK ON JURY VERDICTS
A. Taxpayer Responsibility
The Internal Revenue Code ("Code") requires employers to
withhold federal social security and income taxes from the wages of
their employees and to remit the amounts withheld to the United
States. I.R.C. §§ 3102(a), 3402(b). "The Code [] imposes personal
liability not only upon employers but upon their officers and
agents who are responsible for collecting, accounting for, and
paying over to the government the taxes withheld." Thomsen v.
United States, 887 F.2d 12, 14 (1st Cir. 1989); see I.R.C.
§ 6672(a). When a person required to collect, account for, and pay
over trust fund taxes willfully fails to do so, he is liable for a
penalty equal to the total amount of the unpaid taxes. I.R.C.
§ 6672(a).
The taxpayer bears the burden of proving both that he was
not a responsible person and that his failure to pay over the taxes
was not willful. See Caterino v. United States, 794 F.2d 1, 5 (1st
Cir. 1986). There may be more than one responsible person.
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Harrington v. United States, 504 F.2d 1306, 1312 (1st Cir. 1974).
"Courts have explicitly given the word 'responsible' a broad
interpretation." Caterino, 794 F.2d at 5 (citation omitted). The
controlling inquiry in determining whether the taxpayer should be
held "responsible" is whether the person possessed sufficient
control over corporate affairs to avoid the default. Vinick v.
Comm'r, 110 F.3d 168, 172 (1st Cir. 1997). "In deciding whether an
assessed individual is a 'responsible person' under 26 U.S.C.
§ 6672(a)[], federal courts typically consider various indicia of
responsibility, such as the holding of corporate office, the
authority to disburse corporate funds, stock ownership, and the
ability to hire and fire employees." Adams v. Coveney, 162 F.3d
23, 26 n.1 (1st Cir. 1998).
"Willfulness for purpose of section 6672 means no more
than knowledge that taxes are due and withheld and conscious
disregard of the obligation to remit them." Caterino, 794 F.2d at
6. "Evil motive and specific intent are not necessary elements,"
id., and "delegation will not relieve one of responsibility,"
Harrington, 504 F.2d at 1311. A responsible person acts willfully
if, after becoming aware that the trust fund taxes are not being
paid, knows that other creditors are receiving payment or acts in
"reckless disregard of a known or obvious risk" that trust funds
may not be remitted to the government. Thomsen, 887 F.2d at 17-18.
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Stuart states that the standard "effective power" or
"significant control" tests for the "responsible person" prong of
section 6672 liability are faulty "because there is no limit to the
number of degrees of removal which the power and control tests may
bridge," leading to Stuart being held personally liable when he has
only a very tenuous and indirect formal connection to BBN.
We reject as unfounded Stuart's attack on the standard
tests used to determine section 6672 liability. As discussed
above, the court's analysis looks beyond titles to ascertain
whether the employee had substantial control over corporate
finances. Vinick, 110 F.3d at 172. In determining the employee's
amount of control, courts eschew a mechanical system and consider
a multitude of factors to prevent holding an employee liable where
she did not have power to avoid the default. See Caterino, 794
F.2d at 5.
B. Sufficiency of the Evidence
Stuart contends that the jury had insufficient evidence
to find him a "responsible person" who acted willfully in not
remitting the payroll tax. Stuart did not move for a judgment as
a matter of law at the close of the evidence. "When a litigant has
foregone a timely motion for judgment as a matter of law, the court
of appeals normally will not consider the legal sufficiency of the
evidence." Faigin v. Kelly, 184 F.3d 67, 76 (1st Cir. 1999); see
also 9A Wright & Miller § 2536 (2003) (noting "[i]t is thoroughly
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established that the sufficiency of the evidence is not reviewable
on appeal unless a motion for judgment as a matter of law was made
in the trial court"). We will only review the insufficiency of the
evidence in a case of "plain error apparent on the face of the
record that, if not noticed, would result in a manifest miscarriage
of justice" or where "the verdict is totally without legal
support." 9A Wright & Miller § 2536; see Faigin, 184 F.3d at 76
(stating "the court of appeals retains a modicum of residual
discretion to inquire whether the record reflects an absolute
dearth of evidentiary support for the jury's verdict").
In the case before us, not only is plain error absent,
the record contains ample evidence to support jury findings of
willfulness and responsibility under the Code. Consequently, we
dismiss Stuart's sufficiency of the evidence arguments.
C. Attack on Verdict
Stuart preserved his right to seek relief from the
verdict by making a motion for a new trial, which the trial court
denied. We review a denial for a motion for a new trial under an
abuse of discretion standard, in which "[w]e reverse only if the
verdict is so seriously mistaken, so clearly against the law or the
evidence, as to constitute a miscarriage of justice." Transamerica
Premier Ins. Co. v. Ober, 107 F.3d 925, 929 (1st Cir. 1997).
(quotation marks and citation omitted). We review the district
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court's denial of a new trial for abuse of discretion, and view the
evidence in the light most favorable to the nonmoving party. Id.
The jury's verdicts were not against the great weight of
evidence. In fact, there was substantial evidence from which the
jury could infer that under the Code Stuart was a responsible
person who acted willfully in failing to remit the payroll taxes.
For example, while Stuart was not an officer, director or
shareholder of BBN, the jury could have inferred Stuart had the
requisite control of BBN because Combined Financial was BBN's 80%
shareholder, and Stuart served as president and then as a director
of Combined Financial. The jury also could have considered Stuart
to be the true owner of Combined Financial and the Maynard Mall.
Although Stuart transferred his assets to his wife and children,
there was evidence that he retained actual control. For example,
he made the decision to buy the Maynard Mall building and testified
that his wife, the formal owner of Combined Financial's interest in
BBN, was unaware of who owned stock in Combined Financial.
The jury could also have inferred that Stuart exerted
significant managerial control over BBN's affairs. While Stuart
claimed little involvement in BBN's operations, O'Dell testified
Stuart was at the Maynard Mall five to six days per week and
attended regular Monday meetings. Stuart was involved in the
negotiation of the new BBN Agreement, which gave Combined Financial
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the power to direct BBN's financial affairs if the business was not
properly managed.
As to willfulness, the jury could have inferred that
Stuart acted willfully in not ensuring that BBN's taxes were paid
by coupling Minka's testimony that Stuart knew the payroll taxes
had not been paid with Stuart's failure to show that he
investigated or corrected the mismanagement. Alternatively, the
jury could have inferred willfulness from testimony that Stuart
knew that other creditors, such as Combined Financial and Maynard
Mall, were being paid even though the payroll taxes had not been
paid. Consequently, we find that the district court did not abuse
its discretion in denying Stuart a new trial.1
IV. CONCLUSION
For the reasons stated above, we affirm.
1
Stuart argued in part below that the verdict was against the
clear weight of the evidence because of the district court's
allegedly erroneous and prejudicial ruling granting the
Government's motion in limine to exclude testimony of IRS personnel
regarding the validity of the substitute returns. However, Stuart
forfeits his opportunity to appeal this issue because he failed to
make an attempt to develop this argument in his brief. Twomey v.
Delta Airlines Pilots Pension Plan, 328 F.3d 27, 33 n.4 (noting
that issues alluded to perfunctorily without any developed argument
are deemed waived on appeal).
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