FRANCIS M. ALLEGRA, Judge.
This tax refund case is before the court following trial in Washington, D.C. At issue is whether plaintiff is liable for a so-called "responsible officer" penalty imposed by section 6672(a) of the Internal Revenue Code of 1986 (26 U.S.C.). For the reasons that follow, the court finds that plaintiff, indeed, was liable for the penalty in question and, therefore, is not entitled to the refund he seeks.
To say the least, Mr. Timothy L. Jenkins (plaintiff) has had a distinguished career, with a long list of achievements that includes appointments as the interim president of the University of the District of Columbia, a governor of the United States Postal Service, a consultant to the United Nations High Commissioner of Human Rights, and a trustee for Howard University.
Mr. Jenkins and Mr. Gary A. Puckrein were cofounders of Dialogue Diaspora, Inc. (DDI), a corporation which published American Visions magazine
On August 26, 1992, plaintiff, Mr. Puckrein and Ms. Joanne Harris (Mr. Puckrein's wife) filed articles of incorporation for DDI with the District of Columbia, which articles were accepted by the District on September 21, 1992. The articles listed four directors for the company: plaintiff, Mr. Puckrein, Ms. Harris, and plaintiff's wife, Lauretta Jenkins. On September 15, 1992, Mr. Puckrein received notification that the American Visions trademark had been approved. On or about September 22, 1992, DDI's new board resolved that plaintiff be appointed Chief Executive Officer and Chief Financial Officer of DDI, with the title of "Publisher," and that Mr. Puckrein and Ms. Harris be hired to serve as the President of the Corporation and editor of American Visions, respectively. It was also resolved that DDI would become the designated publisher of American Visions in exchange for its assuming specified debts owed to Brown Printing Company (Brown Printing), which printed the magazine. The board minutes also reflect that the initial distribution of voting stock was 55 percent to Mr. Jenkins, 22.5 percent to Mr. Puckrein and 22.5 percent to Ms. Harris.
On September 22, 1992, plaintiff, Mrs. Jenkins, Warwick Communications, Brown Printing and Mr. Puckrein (on behalf of DDI) executed an agreement that stated that DDI would become the producer, publisher and owner of American Visions. The agreement described Mr. Jenkins as being "an executive officer and an equity participant" in DDI. Under the agreement, Brown Printing agreed to continue to print the magazine at its usual and customary rates. The agreement acknowledged that DDI could not pay Brown Printing on a current basis. Instead, Brown Printing agreed to continue to print the magazine provided that DDI would: (i) make a series of scheduled payments; and (ii) assume all outstanding obligations owed by Warwick (the prior publisher of American Visions). Plaintiff and Mr. Puckrein, agreed to guarantee jointly and severally all payments due to Brown Printing by DDI, and plaintiff agreed to secure his guarantee with a deed of trust in favor of Brown Printing as to property he owned on S Street, N.W., in the District of Columbia (the S Street Property).
DDI's corporate ledger shows that as of October 3, 1992, plaintiff, Mr. Puckrein, and Ms. Harris owned 550, 225, and 225 shares of DDI's stock, respectively.
To further secure this loan agreement, on January 27, 1993, DDI's Board of Directors (plaintiff, Mrs. Jenkins, Mr. Puckrein and Ms. Harris) executed a "Stand By Voting Trust and Uniform Commercial Code Security Agreement." The first part of this agreement established a voting trust. Mr. Puckrein and Ms. Harris each pledged to that trust approximately five percent of the 225 DDI shares each owned, yielding a total of 22.5 shares. Plaintiff had the option, by exercising this voting trust, of controlling fifty-five percent of the shares of the corporation. Plaintiff and Mrs. Jenkins, jointly and separately, accepted the pledges as trustees of the voting trust.
The second part of this agreement was a loan agreement secured by a factor's lien. This part identified plaintiff, along with his wife, as the "Factor," and DDI and Mr. Puckrein as the "Borrower." The agreement provided that Mr. and Mrs. Jenkins would lend the Borrower an amount to exceed the lesser of either $200,000 or the sum of eighty percent of the net current accounts receivable of the Borrower. This loan was secured in favor of the Factor by a "continuing lien upon all merchandise of the borrower and upon all accounts receivable or other proceeds resulting from the sale or other disposition of such merchandise." The Borrower further assigned to the Factor "all of its merchandise and all of its accounts receivable or other proceeds." This agreement further recited that: (i) DDI would provide monthly detailed financial reports to Mr. and Mrs. Jenkins; (ii) Mr. and Mrs. Jenkins had "all the rights and remedies of [DDI] in respect to the merchandise and the accounts receivable," including the right to receive payments from any person owing an account receivable to DDI; (iii) without notice to DDI, all accounts receivable and proceeds were assigned to Mr. and Mrs. Jenkins; and (iv) the Borrower was restricted from performing a number of activities, including borrowing money (except from the Factor), employing additional employees or increasing their salary, or making any expenditures except in the ordinary course of business.
On May 20, 1994, Mr. Puckrein, in his stated capacity as President and Chief Operating Officer of DDI, and plaintiff, acting as a "Personal Surety," signed an "Interest Bearing Bond" in favor of Hilbert R. Sandholm, through Mr. Sandholm's guardian, Sandra L. Reischel, evidencing a $100,000 obligation owed by DDI to Mr. Sandholm. On October 3, 1994, plaintiff executed a promissory note under which both DDI and plaintiff promised to pay Ms. Reischel $90,000, plus interest, within six months. The note was signed twice by plaintiff, once in his capacity as Publisher/CEO of DDI and again as a personal guarantor. The proceeds of this bond were not used to pay off past debts, but rather for growth opportunities.
Mr. Jenkins provided DDI with funds on other occasions. Between August 17, 1992, and November 9, 1994, he wrote a series of checks on his personal account (or that of TLJ International) payable to DDI (or to American Visions), the memo lines on which reflect various purposes relating to the operation of DDI.
An entry in DDI's corporate ledger reflects that as of February 1, 1995, Ms. Harris and Mr. Puckrein each transferred 12.5 shares of their DDI stock to "TL & LC Jenkins, Voting Trustees." A March 24, 1995, entry in the same ledger reflects that plaintiff transferred fifty shares of DDI stock to Mr. Puckrein.
Some time early in 1995, Mr. Jenkins and Mr. Puckrein had a major falling out. On March 23, 1995, Mr. Jenkins sent Mr. Puckrein a letter notifying him of a March 31, 1995, meeting of the directors of DDI.
No later than April of 1995, plaintiff learned from Mr. Puckrein that DDI had been experiencing employment tax problems with the IRS and had entered into an installment agreement with the Internal Revenue Service (IRS) for the payment of those taxes.
Sometime before June 9, 1995, Mr. Jenkins learned that DDI was still not compliant in making its tax payments. At or around this same time, plaintiff learned that Mr. Puckrein had been secretly operating another company, American Visions Enterprises, some of whose activities paralleled those of DDI. On June 9, 1995, Mr. Jenkins (as secretary and a director of DDI) and Mrs. Jenkins (as director of DDI) wrote Ms. Harris, calling a special meeting of DDI's Board of Directors for June 12, 1995. A copy of this letter was faxed to the IRS with the following handwritten message: "Attn: Mrs. Venita Gardner, Group Manager Collection, Internal Revenue Service, 500 North Capitol Street. Please note our desire to have one of your agents in attendance at this meeting. Timothy Jenkins."
On June 12, 1995, Mr. Puckrein wrote Mr. Jenkins protesting the latter's action in changing the locks on the S Street Property and indicating that neither he nor Ms. Harris intended to recognize any of the actions that might be taken at the board of directors' meeting scheduled for later that day.
The DDI board of directors, indeed, met on June 12, 1995. The minutes of that meeting, which were signed by plaintiff, as Secretary of DDI, reflect that the following individuals were present: Mr. Jenkins (identified as a DDI director); Mrs. Jenkins (identified as a DDI director); Ms. Harris (identified as a DDI director); Mr. Puckrein; various legal counsel for the parties; and Robert A. Bendery, from the "Collections Dept. of the Internal Revenue Service." The minutes indicate that Mr. Puckrein and Ms. Harris explained that they were present only to object to the meeting and declare the proceedings to be null and void. Despite this, the minutes indicate that the following resolutions were adopted by a two-thirds majority of the voting members of the DDI board: (i) that all acts affecting DDI, DDI's staff and DDI's property taken by persons purporting to act on behalf of American Visions Enterprises were null and void; (ii) that Marilyn Crawford was appointed President of DDI; (iii) that Mr. Puckrein was removed as Editor-in-Chief and spokesperson of American Visions; (iv) that Ms. Crawford, as DDI's President, and Mr. Jenkins, as the Publisher and Secretary/Treasurer of the DDI Board were the new authorized signatories on DDI's various bank accounts; and (iv) that a DDI Executive Committee was appointed, comprised of Mr. and Mrs. Jenkins.
On June 15, 1995, Mr. Jenkins signed an IRS Form 4180, Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Tax. This form was also signed by Revenue Officer Bendery. The form reflected, inter alia, that plaintiff owned fifty percent of DDI and that beginning in 1992 and 1993, plaintiff had opened corporate bank accounts, signed corporate checks and guaranteed or co-signed corporate bank loans. The form also indicated that plaintiff had determined "[c]ompany financial policy." In a later segment, the form indicated that plaintiff had become aware of the delinquent taxes based upon the issuance of DDI's year-end financial statements for 1993 and 1994.
On July 5, 1995, plaintiff wrote a check on DDI's bank account at Industrial Bank for $16,668.47 made payable to him and Mrs. Jenkins.
On July 29, 1995, Mr. Jenkins, Mr. Puckrein and DDI (by Mr. Puckrein) entered into a Stock Purchase Agreement pursuant to which Mr. Puckrein agreed to purchase plaintiff's 500 shares of DDI stock (identified therein as representing 50 percent of the issued and outstanding DDI stock) for $50. In addition, Mr. Puckrein agreed to discharge DDI's debt to Mr. Jenkins by means of a $200,000 payment due by January 30, 1996. The agreement further stated that if Mr. Puckrein failed to pay this debt when due, the transferred shares referenced would revert to Mr. Jenkins at the price originally paid.
As the foregoing would suggest, for the quarterly tax periods ending March 31, 1993, through September 30, 1995, DDI filed Federal employment tax returns but failed to pay in full to the IRS the liabilities associated therewith. Mr. Puckrein signed the returns filed during this period. The liability for the unpaid employment taxes for the first of these periods (that of March 31, 1993) was assessed by the IRS on June 14, 1993. On August 7, 1995, Mr. Puckrein signed an IRS Form 433-D, entitled a "Tentative Installment Agreement," for payment of DDI's employment tax liabilities. During this period, DDI became increasingly past-due on its rent payments to plaintiff — as of June 1, 1995, it owed Mr. and Mrs. Jenkins $84,156, and by October 31, 1995, that figure had swelled to $117,381. On December 1, 1995, Revenue Officer Bendery wrote Mr. Jenkins, indicating that the IRS had been unable to collect trust fund taxes owed by DDI and was prepared to assess a Trust Fund Recovery Penalty against him. On January 26, 1996, plaintiff responded to this letter, protesting the assessment of a penalty against him. On June 9, 1997, the IRS denied plaintiff's protest. On January 28, 1998, the IRS assessed against Mr. Jenkins a penalty of $189,972, pursuant to section 6672(a) of the Code, for failure to pay over withheld employment taxes.
After various procedural steps were taken, in 2005 and early 2006, the IRS collected an amount corresponding to the penalty asserted against plaintiff (plus accrued interest) by levying on plaintiff's individual retirement account and Social Security benefits. The total amount recovered in this fashion was $264,097.56. On February 5 and 6, 2007, plaintiff filed a claim for refund seeking the return of these funds. On May 10, 2007, the IRS send plaintiff a notice of claim disallowance. Subsequently, plaintiff timely filed this refund suit on January 24, 2008.
Subsequently, in the course of discovery, it was determined that plaintiff's IRS administrative file had been lost. On April 14, 2010, plaintiff filed a Motion for an Order Shifting the Burden of Production and Proof to Defendant, in which he alleged that the loss of the administrative file, and the concomitant loss of material establishing the historical factual basis for the IRS' assessment of the penalty against him, altered, in his favor, various rules concerning the presumption of correctness and burden of proof ordinarily associated with a tax refund suit.
We begin with common ground. Every employer is required to deduct and withhold federal income tax and Federal Insurance Contributions Act (FICA) tax from employees' wages as and when they are paid. See 26 U.S.C. §§ 3102 (FICA) and 3402(a) (income tax). Under section 7501 of the Code, such amounts are held in trust for the United States and thus are commonly referred to as trust fund taxes. See Slodov v. United States, 436 U.S. 238, 243 (1978). In imposing the obligation to collect these taxes on other than the actual taxpayer, Congress recognized that collectors might fail to set aside and pay over the taxes to the United States. See United States v. Sotelo, 436 U.S. 268, 277 n.10 (1978). Where, as here, the collector fails to remit the withheld taxes, the United States must, nevertheless, credit each taxpayer as if the funds were actually paid over. See, e.g., 26 C.F.R. § 1.31-1(a) (2010); see also Slodov, 436 U.S. at 243; United States v. Huckabee Auto Co., 783 F.2d 1546, 1548 (11th Cir. 1986). As a consequence, the United States obligates itself to pay benefits such as social security and income tax refunds, for which there is no corresponding revenue. See Emshwiller v. United States, 565 F.2d 1042, 1044 (8th Cir.1977) ("any failure by the employer to pay withheld taxes results in a loss to the government in that amount"); Salzillo v. United States, 66 Fed. Cl. 23, 31 (2005).
To protect against such losses, the persons responsible for ensuring that the trust fund taxes are paid, who willfully fail to do so, may be held personally liable under section 6672 of the Code. See 26 U.S.C. § 6672; see also United States v. Bisbee, 245 F.3d 1001, 1005 (8th Cir. 2001). Section 6672(a) states in pertinent part:
26 U.S.C. § 6672(a). By its terms, then, liability under section 6672 results from the confluence of three factors: "(1) There must be a `person' who (2) is required to collect, truthfully account for and pay over taxes, but who (3) `willfully' fails to do so." Emshwiller, 565 F.2d at 1045; see also Vinick v. United States, 205 F.3d 1, 3-4 (1st Cir. 2000); United States v. Landau, 155 F.3d 93, 101 (2d Cir. 1998), cert. denied, 526 U.S. 1130 (1999); Cook v. United States, 52 Fed. Cl. 62, 68 (2002).
"The first two of these requirements are typically collapsed into the single concept of a `responsible person,'" this court has stated, "while the willfulness criteria commands separate attention." Salzillo, 66 Fed. Cl. at 32. Both the responsible person analysis and the assessment of willfulness are fact-based determinations unique to the circumstances of each case. See Feist v. United States, 607 F.2d 954, 957 (Ct. Cl. 1979); Bauer v. United States, 543 F.2d 142, 148 (Ct. Cl. 1976). An individual against whom the IRS has made a section 6672(a) assessment ordinarily has the burden of proving, by a preponderance of the evidence, that at least one of the composite elements of liability under that section is absent. See Landau, 155 F.3d at 101; Cook, 52 Fed. Cl. at 68. And that burden squarely falls on plaintiff here.
A. Was Plaintiff a Responsible Person?
Section 6672 of the Code adopts the term "person(s)" as used by section 6671(b), which, in turn, defines person as: "includes an officer or employee of a corporation . . . who as such officer, employee, or member, is under a duty to perform the act in respect of which the violation occurs." Through section 6672 and the definition contained in section 6671(b), the United States seeks "to protect the government fisc by facilitating the collection of taxes from those who have both the responsibility and authority to avoid the default." Cook, 52 Fed. Cl. at 68; see also White v. United States, 372 F.2d 513, 516 (Ct. Cl. 1967); Salzillo, 66 Fed. Cl. at 32. It is a further bedrock principle that the determination whether a person is responsible "is a matter of substance not form and is determined by the coincidence of status, duty and authority" — with the duty to ensure that taxes are paid flowing from authority that enables one to do so. Cook, 52 Fed. Cl. at 68; see also Opliger v. United States, 637 F.3d 889, 893 (8
While determining responsibility perforce requires consideration of the totality of the circumstances, the Federal Circuit has outlined a number of relevant considerations:
Godfrey v. United States, 748 F.2d 1568, 1576 (Fed. Cir. 1984) (internal citations omitted); see also De Alto v. United States, 40 Fed. Cl. 868, 876 (1998).
Godfrey, 748 F.2d at 1575 (internal citations omitted); De Alto, 40 Fed. Cl. at 875; see also Barrett, 580 F.2d 449, 452 (Ct. Cl. 1978); Bolding v. United States, 565 F.2d 663, 670-71 (Ct. Cl. 1977); Bauer, 543 F.2d at 148; White, 372 F.2d at 517 ("the courts are looking for the person who could have seen to it that the taxes were paid").
Notwithstanding the "ultimate authority" language employed in Godfrey, the Federal Circuit and other courts have made clear that there can be more than one responsible person as "liability attaches to all those under the duty set forth in the statute." Harrington v. United States, 504 F.2d 1306, 1311 (1st Cir. 1974); see also, e.g., Lubetzky v. United States, 393 F.3d 76, 80 (1st Cir. 2004); Gephart, 818 F.2d at 473; Godfrey, 748 F.2d at 1574-75; Thibodeau v. United States, 828 F.2d 1499, 1503 (11th Cir. 1987); White, 372 F.2d at 516; Scott v. United States, 354 F.2d 292, 296 (Ct. Cl. 1965). "[T]he statute expressly applies to `any' responsible persons," one court has explained, "not just to the person
Plaintiff contends that he was not a "responsible person" within the meaning of section 6672 for the periods in question. The record before the court, however, belies this assertion.
It reveals that Mr. Jenkins held various positions of significant authority within the corporation, including Chief Executive Officer and Chief Financial Officer of the corporation. He was, as well, the publisher of American Visions, the primary publication of the corporation. He sat on the company's board and, during the period in question, owned (together with his wife) at least fifty percent of the company's stock. In addition, Mr. Jenkins had the ability to sign checks on DDI's primary bank account and the ability to withdraw funds from those accounts. By virtue of his stake in the corporation and his role as a director, Mr. Jenkins also had the ability to precipitate reorganizations of the corporation's leadership. What is more, Mr. Jenkins possessed an additional entrepreneurial stake in DDI via his role in financing the company — he provided the initial operating funds for the company by directly extending credit to DDI, and negotiated financing transactions with, and encumbered his property to obtain credit from, third parties. Because of his diverse roles and owing to the explicit terms of the factoring agreement, plaintiff enjoyed the right to review the corporation's financial records, including records reflecting the company's payroll tax deposits. Last, but not least, plaintiff was the company's landlord, leasing it the building that was its principal place of business.
Owing to his multi-faceted role within the corporation and his role as a financier of first resort, plaintiff plainly had the leverage and authority to "avoid the default" and demand that the corporation not squander the taxes it withheld from its employees. See Feist, 607 F.2d 960 ("Any corporate officer, or employee with the power and authority to `avoid the default' or to direct the payment of the taxes is a responsible person within the meaning of section 6672."); White, 372 F.2d at 516; see also Thomas v. United States, 41 F.3d 1109, 1120 (7
In arguing otherwise, plaintiff makes several claims. First, he contends that the court should disregard his various titles, claiming that they did not give him the actual authority to ensure the satisfaction of the tax obligations of DDI. If, indeed, his titles were mechanical, plaintiff might be right. See Barnett, 988 F.2d at 1455-56; White, 372 F.2d at 516. But, this claim is contradicted by the various occasions on which plaintiff injected himself into the decision-making process of the corporation. A prime example is plaintiff's activities during the period of June 9-12, 1995. On the first of these days, when plaintiff allegedly discovered the depths of the DDI's withholding tax problems with the IRS, Mr. Jenkins locked DDI out of the S Street property, invoking the Treasury Department's name in doing so, and called a meeting of the board of directors to which he invited representatives of the IRS. And, at that directors meeting, Mr. Jenkins won approval of major changes to the corporation's structure — the firing of Mr. Puckrein, the hiring of a new corporate President, the creation of an Executive Committee of the Board to which he and his wife were appointed, and his designation as having signature authority on all of the corporation's bank accounts. These actions well-illustrate that Mr. Jenkins was no figurehead, but rather, as his wide experience in managing large organizations would suggest, one who could make his will felt within the corporation when he so desired.
Notwithstanding this, plaintiff stresses that he exercised no day-to-day decision-making authority regarding DDI's federal tax matters — he did not deal with payroll matters and thus had nothing to do with tax withholdings and federal payroll tax deposits; he did not sign any of the corporation's tax returns; and he did not decide whether vel non to pay the taxes owed. And, all this appears true — but irrelevant. For it is well-accepted that one need not actually perform these tax functions in order to be a responsible person under section 6672. See Mueller v. Nixon, 470 F.2d 1348, 1349 (6
What the Court of Claims held forty years ago is apt here. In a case similar to this, it observed that "[a]s a general proposition it may be safely postulated that one who is the founder, chief stockholder, president, and member of the board of directors of a corporation . . . is rebuttably presumed to be the person responsible under section  of the Code . . . in the absence of an affirmative showing by him that in actual fact he lacked the ultimate authority to withhold and pay the employment taxes in question." McCarty v. United States, 437 F.2d 961, 967-68 (Ct. Cl. 1971); see also Feist, 607 F.2d at 960. Here, plaintiff was the founder, major stockholder, chief executive officer, publisher and member of the board of directors of DDI. He was also the corporation's primary financier and its landlord. And plaintiff has provided no affirmative showing that in actual fact he lacked the ultimate authority to avoid the corporation's default on its withholding tax obligations. He was then, irrebuttably — responsible.
B. Was Plaintiff Willful?
Even a responsible person is not liable for a penalty under section 6672(a) unless his or her failure to collect, account for, or remit withholding taxes was willful. Godfrey, 748 F.2d at 1574. "Whether `the failure to pay the overdue taxes [is] willful has been seen . . . as calling for proof of a voluntary, intentional, and conscious decision not to collect and remit taxes thought to be owing.'" Godfrey, 748 F.2d at 1576-77 (alterations in original) (quoting Scott v. United States, 354 F.2d 292, 295 (Ct. Cl. 1965)). The Supreme Court has indicated that willfulness requires some showing of "personal fault." See Slodov, 436 U.S. at 254. "Mere negligence" is insufficient to constitute willfulness under section 6672. Godfrey, 748 F.2d at 1577. On the other hand, "it is not necessary that there be present an intent to defraud or to deprive the United States of the taxes due, nor need bad motives or wicked design be proved in order to constitute willfulness." White, 372 F.2d at 521; see also Monday v. United States, 421 F.2d 1210, 1216 (7th Cir.), cert. denied, 400 U.S. 821 (1970) (the individual's bad purpose or evil motive in failing to collect and pay the taxes "properly play no part in the civil definition of willfulness."); Godfrey, 748 F.2d at 1577; Ghandour, 36 Fed. Cl. at 62.
Limning the appropriate standards to be applied herein, the Federal Circuit has held that willfulness may be shown in at least two ways: (i) "a deliberate choice voluntarily, consciously and intentionally made to pay other creditors instead of paying the [g]overnment" or (ii) "reckless disregard of a known or obvious risk that the taxes may not be remitted to the government." Godfrey, 748 F.2d at 1577. Decisions of the Court of Claims are to similar effect. See Feist, 607 F.2d at 961; Bolding v. United States, 565 F.2d 663, 672 (Ct. Cl. 1977). Under the first of these prongs, a responsible person who pays net wages to employees with the knowledge that there are insufficient funds with which to pay the employment taxes commits a willful failure to collect and pay over under section 6672. See Emshwiller, 565 F.2d at 1045; Sorenson v. United States, 521 F.2d 325, 328 (9
Plaintiff claims that he did not willfully fail to collect, account for or remit the withholding taxes owed by DDI because once he found out about that liability, he made every effort to assist the IRS in collecting what it was due. But, this claim proves too much.
For one thing, this claim pivots on the false notion that plaintiff was not obliged to facilitate the collection of the withholding taxes until he supposedly found documents on June 9, 1995, indicating that DDI had defaulted on its installment agreements with the IRS. In fact, the record demonstrates that, at least as early as April of 1995 — and perhaps well before that
At all events, "[e]ven if a `responsible person' is unaware that withholding taxes have gone unpaid in
Plaintiff manifestly failed to satisfy his duty to use unencumbered funds to pay back the IRS. True enough, there is little doubt that he had an earnest desire for DDI to pay the back and current taxes it owed the IRS — but only if did not adversely impact his own ability to recoup moneys owed him by DDI. It was in pursuit of the latter goal, and certainly not the former, that three weeks after the critical board meeting with the IRS, plaintiff wrote himself a check for $16,668.45 — the last of at least thirteen checks that he signed between April 12, 1995, and the day he closed out DDI's account at Industrial Bank.
Plaintiff claims that the funds he took were "encumbered" and thus unavailable for payment to the IRS. He argues that his factor lien took priority over the overdue withholding tax obligation, entitling him to any funds that the corporation received from third parties. But, as will be explained, the law does not allow a responsible person to avoid liability for unpaid withholding taxes by enforcing a security arrangement with his own corporation that favors his own interests over those of the United States.
As a threshold matter, a very good argument can be made that, as to at least some of the funds in question, plaintiff's factoring lien did not have priority over the interests of the IRS. It is well-accepted that section 7501 of the Code impresses the taxes withheld from employees with a trust. See Begier, 496 U.S. at 60 (the act giving rise to tax liability, i.e., the payment of wages, gives rise to a statutory trust in favor of the United States); Cabot v. United States, 38 Fed. Cl. 682, 693 (1997).
But even if plaintiff's factoring lien somehow had priority over the trust created under section 7501, it remains well-established that, for purposes of establishing willfulness, funds are deemed "encumbered" only where "the taxpayer is legally obligated to use the funds for a purpose other than satisfying the preexisting employment tax liability." Honey, 963 F.2d at 1090; see also Conway, 647 F.3d at 237 ("funds are encumbered when `restrictions preclude a taxpayer from using the funds to pay the trust fund taxes.'") (quoting Barnett, 988 F.2d at 1458); Bell v. United States, 355 F.3d 387, 394 (6
Discretion is power — a commodity to be prized. And plaintiff had ample power and ability to change the course of events here. But, he did not. His claims of obtuseness do not persuade. Hence, the court finds that plaintiff's nonfeasance, at a minimum, constituted "`a reckless disregard of a known or obvious risk that trust funds may not be remitted to the government.'" Oppliger, 637 F.3d at 894 (quoting Keller v. United States, 46 F.3d 851, 854 (8
The court will not gild the lily. It understands that Mr. Jenkins is frustrated. Although the court cannot stand in his shoes, there is little doubt that he suffered grievous wrongs at the hands of others involved with the operations DDI. But, what happened to plaintiff, bad as it was, neither gave him license to engage in self-help insofar as the interests of the United States were concerned, nor relieved him of the overarching responsibility he had to ensure that DDI did not default on its tax obligations. Even in this context, "[t]wo wrongs do not make a right;" they "simply make two wrongs." Minnick v. California Dept. of Corrections, 452 U.S. 105, 128 n.3 (1981) (Stewart, J. dissenting).
Mr. Jenkins was responsible for paying DDI withheld taxes over, he willfully failed to do so and, therefore, is liable for the 100 percent penalty assessed under section 6672(a) of the Code. As such, the Clerk is directed to enter judgment dismissing plaintiff's complaint. No costs.
In this same vein, Mr. Jenkins testified that the document "was calculated that in circumstances [wh]ere they were in default, that we would be able to demand the additional shares necessary to have a majority of the corporate board and control the affairs of the corporation."
Nevertheless, under cross-examination, plaintiff admitted that he did nothing to verify Mr. Puckrein's claims that the taxes were being paid.
Moreover, some of plaintiff's testimony at trial was consistent with the view that he knew about DDI's tax problems prior to June 9, 1995. Indeed, plaintiff, at one point, admitted that he met with Revenue Officer Bendery on several occasions prior to June 9, 1995, presumably based on concerns that DDI was not keeping current on either its new tax obligations or in making payments on its installment agreements. Moreover, plaintiff also testified that, in June 9, 1995, plaintiff invited Mr. Bender's supervisor to the June 12, 1995, board meeting because he was dissatisfied with his prior dealings with Mr. Bender. Of course, plaintiff could not have had that view of Mr. Bender if, as he contends now, he first discovered Mr. Bender's name while going through DDI's papers on June 9, 1995, the same day that he sent the meeting notice to the IRS. Indeed, in deposition testimony that Mr. Jenkins gave in the D.C. Superior Court case he filed against Mr. Puckrein, he admitted that there was "more than one" meeting with the IRS prior to the meeting of the board of directors on June 12, 1995.
S. Rep. No. 558, 73d Cong., 2d Sess. 53 (1934).
Id. at 102. For a further discussion of the common law roots of this rule, see Cunningham v. Brown, 265 U.S. 1, 12-13 (1924); Schuyler v. Littlefield, 232 U.S. 707 (1914); In re Columbia Gas Systems, Inc., 997 F.2d 1039 (3rd Cir. 1993), cert. denied, 510 U.S. 1110 (1994).