United States v. Fay

1991 | Cited 0 times | First Circuit | December 31, 1991

Per Curiam. The Internal Revenue Code requires that an employer withhold federal income and social security taxes from its employees' wages, 26 U.S.C. §§ 3102, 3402, and hold such funds in trust for the United States, id. § 7501. If the employer fails to remit these funds to the United States, the Code permits the Internal Revenue Service (IRS) to collect a "penalty" equal to the amount of delinquent taxes from any officer or agent of the employer who was responsible for collecting, accounting for, and paying over the withheld taxes. Id. § 6672(a).1 Although denominated a penalty, liability under § 6672 is a civil rather than penal sanction, designed simply to ensure that the taxes owed the government are paid. See, e.g., Turnbull v. United States, 929 F.2d 173, 178 n.6 (5th Cir. 1991). A person is subject to § 6672 liability if he or she is a "responsible person" who "willfully" failed to remit the withheld taxes. See, e.g., Slodov v. United States, 436 U.S. 238, 245, 246 n.7 (1978).

The instant appeal involves a § 6672 penalty imposed for taxes that were withheld, yet not paid, by seven Massachusetts nursing homes in various taxable periods from 1976 to 1978. The IRS subsequently made assessments in the amount of $200,183.45 against Claire Fay (the appellant here) and Louis Almeida, citing them as "responsible persons" under the statute. In 1984, the IRS brought the instant suit under 26 U.S.C. § 7401, seeking to reduce the outstanding tax liabilities to judgment. Following a bench trial, the district court determined that Fay was subject to liability under § 6672.2 Judgment in the amount of $699,142.21 (reflecting taxes and accrued interest) entered on December 30, 1990. Fay now appeals pro se, alleging that her sale of the nursing homes to Almeida in June 1976, and her limited involvement therein after that date, precluded a finding that she was a "responsible" person who had "willfully" failed to remit the taxes in question. We affirm.


The legal standards governing the instant appeal are well-established. Indeed, this court (along with others) has had occasion in recent years to enunciate them in considerable detail. See Thomsen v. United States, 887 F.2d 12 (1st Cir. 1989); In re Energy Resources Co., 871 F.2d 223 (1st Cir. 1989), aff'd, 495 U.S. 545 (1990); Caterino v. United States, 794 F.2d 1 (1st Cir. 1986), cert. denied, 480 U.S. 905 (1987); Harrington v. United States, 504 F.2d 1306 (1st Cir. 1974). We here offer a brief review.3

Whether an individual is a "responsible person" depends principally on the degree of control he or she exercises over the employer's finances. Hochstein v. United States, 900 F.2d 543, 546-47 (2d Cir. 1990); Caterino, 794 F.2d at 5. Courts have construed the term broadly, fashioning an elastic definition which focuses on the person's function in the employer's business rather than the level of office held. Id. The pivotal consideration is whether the person had effective power--i.e., significant (rather than exclusive) control--to decide whether taxes should be remitted and which bills to pay and when. Id. Responsibility is generally a matter of status, duty and authority, not knowledge. Thomsen, 887 F.2d at 16. Among the indicia of responsibility are the holding of corporate office, control over financial affairs, the authority to disburse funds, stock ownership, and the ability to hire and fire employees. Id. The statute encompasses all responsible persons, not just the most responsible person, Harrington, 504 F.2d at 1312, and applies to those who delegate substantial responsibility, Thomsen, 887 F.2d at 17. And it can include those who are neither officers nor employees of the company; responsibility has been imposed, for example, on sureties, creditors, individuals providing funds, institutional lenders, and even employees of lenders. See Caterino, 794 F.2d at 5, 6 n.1 (citing cases).

"Willfulness," in turn, denotes conduct that is intentional, knowing and voluntary, as well as that taken in reckless disregard of obvious and known risks. Thomsen, 887 F.2d at 17-18. Unlike in the criminal context, willfulness here does not require bad motive or the absence of justifiable excuse, much less a specific intent to defraud the government. Id. at 17. Rather, it 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. And behavior falling short of an intentional failure to remit taxes can still be deemed willful. Liability under § 6672 can be established, for example, upon a showing that a responsible person voluntarily preferred other creditors over the United States--i.e., paid other creditors with knowledge that withholding taxes were owing to the government. Thomsen, 887 F.2d at 17. Even if done in good faith, or in the mistaken belief that such payments were required to be made in preference to payments to the government, the conduct is nonetheless willful. Id. at 17-18.4

Once the government has established a prima facie case by introducing into evidence its assessment of taxes due, the taxpayer bears the burden of demonstrating (by a preponderance of the evidence) both lack of responsibility and lack of willfulness. See, e.g., Morgan v. United States, 937 F.2d 281, 285, 286 (5th Cir. 1991) (per curiam); Oliver v. United States, 921 F.2d 916, 919 (9th Cir. 1990); Hochstein, 900 F.2d at 546. As in Caterino, the issue here on appeal is "whether the factual findings that support the district court's conclusions of responsibility and willfulness are clearly erroneous." 794 F.2d at 3.5


With these standards in mind, we turn to the facts at hand. It was undisputed at trial that: (1) Fay began operating nursing homes in Massachusetts in the mid-1950's; (2) by 1976, she was operating the seven nursing homes at issue here, which were owned by certain trusts under her control; (3) on June 21, 1976, Fay sold the homes to Almeida (as trustee of various trusts);6 and (4) Fay thereafter continued to participate in the homes' management, including serving as administrator for three of them until October 1976. Fay sought to establish below that her managerial role after October 1976 was minimal, and entailed none of the powers or duties that would render her a "responsible person" under the statute. The district court justifiably found otherwise.

The court first determined that the sale of the homes to Almeida, while not "totally . . . a sham," was less than entirely bona fide. The court did find a legitimate reason for the transfer: due to an impending change in state law, nursing homes sold before July 1, 1976 (unlike those sold thereafter) would receive an "adjustment of basis for fixed assets" that would increase their value.7 Yet other circumstances surrounding the transfer were suspicious. At the time of the sale, Almeida was the owner and operator of a lawn ornament business; he had no prior experience in operating nursing homes, and the district court found him "wholly incompetent" to do so. The cumulative purchase price for the seven homes was $3,088,855.50. Under the sales agreement, Almeida was to pay $70,000 (less than three per cent) of this in cash; as to the balance, he executed large promissory notes to Fay secured by mortgages on the homes, and also assumed mortgages already in existence. In the years following the transfer, Almeida made none of the cash payments called for under the agreement, and made only a few of the mortgage payments. Yet Fay took no action to recover the homes.

Also calling the legitimacy of the sale into question was evidence that, at the time thereof, Fay was experiencing difficulties with various state authorities. She was then under investigation by the Attorney General's Office for alleged welfare fraud, misuse of patients' trust funds and other offenses in connection with her operation of the homes in question. (She later was indicted for, and pled guilty to, various such offenses, and was imprisoned from October 3, 1977 to December 22, 1977.)8 There was also evidence that the Commonwealth was attempting during this period to remove Fay from the nursing home business. Three of the nursing homes (Forest Manor, Chester Manor, and Exeter House) were undergoing a decertification process at the time of the sale, and were in fact decertified between July 1976 and January 1977. And as part of the recertification process, the Commonwealth insisted to Almeida that, within three months after the sale, Fay was to have no further involvement with the homes. At trial, Marie Boose, who worked as a bookkeeper for these three homes from January 1976 to August 1978, stated: "Prior to June 21, 1976, Claire Fay told me that she was transferring title to all of her nursing homes to Louis Almeida because of problems she was having with the Commonwealth of Massachusetts but that she would continue to be the real owner of the nursing homes."9 The district court accorded this testimony full credit.

The court further found that, notwithstanding Fay's protestations to the contrary,10 she continued to occupy a dominant managerial role in each of the seven nursing homes following the sale. Far from being clearly erroneous, this finding is strongly supported by the record. The evidence showed that Fay regularly visited the homes' central office in Somerset, Massachusetts, interviewed prospective employees, made hiring recommendations to Almeida, issued instructions to employees, told the bookkeepers which bills to pay, and paid many bills herself with the use of a rubber stamp bearing Almeida's signature. And in particular, the evidence showed, and the district court found, that Fay possessed the power to decide, and did in fact decide, not to remit the withholding taxes at issue here.

Boose's testimony concerning the Forest, Chester and Exeter homes was unequivocal: Fay "ran the nursing homes." Boose (who worked out of an office in Cambridge) stated that Fay would call her on a daily basis with instructions as to which bills to pay.11 Almeida, Boose explained, occasionally would issue directions, but Fay was her primary source of instructions. Fay continued to do so even while in prison, calling Boose at home during the evenings. Boose further stated that she handled the homes' payroll tax returns for approximately one year (the task was later shifted to the central office). During that time, Fay's "consistent" instructions to her were to file the returns without payment of the taxes shown as due.

With respect to the other four homes, the testimony of Gertrude St. Denis was to similar effect. St. Denis performed bookkeeping chores in the Somerset office between April and August 1978. She testified that, when she was hired, Almeida told her that Fay would instruct her as to her duties. Thereafter, Fay regularly instructed her concerning which bills to pay; Almeida, she said, never did so. (In fact, she never saw Almeida again after being hired; he would arrive at the office early and be gone by the time she arrived at 9:30.) St. Denis also indicated that, of the 100 or more checks that were issued to creditors each month, Fay would use the signature stamp herself to endorse at least half.

Additional evidence consisted of a settlement agreement reached on June 5, 1978 between Almeida and the Department of Public Health. In return for the continued certification of the homes, Almeida there made various admissions and promises. Among them were his acknowledgement that Fay had continued to participate in the management of the homes, and his assurance that she would thereafter not do so.12 The government also introduced an excerpt from Fay's 1978 probation revocation hearing, in which the state court found that she had continued to manage the homes and had possessed "almost unlimited access" to their financial accounts. The court, while declining to give preclusive effect to these findings, deemed them relevant to establish a motive for Fay "to seek to conceal from various authorities her active involvement."

The district court was obviously justified in concluding from this evidence that Fay was a "responsible person." The further conclusion that she "willfully" failed to remit the withholding taxes in question was equally supportable; indeed, her own acknowledgement that she had been aware other bills were paid while the taxes were owing was sufficient to establish this element. We therefore reject her contention that the underlying findings of fact are clearly erroneous. And her additional assertion that insufficient funds existed to make the tax payments is equally unpersuasive. This assertion was unsupported by any evidence below, and would in any event pose no bar to § 6672 liability. See note 4 supra.




1. Section 6672(a) provides in pertinent part: 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.

2. The case against Almeida had earlier been dismissed, at the government's request, on the ground that any judgment obtained against him would be uncollectible.

3. The standards here enumerated, which are drawn principally from this circuit's case law, echo those adopted by other circuits. See, e.g., Kenagy v. United States, 942 F.2d 459, 464 (8th Cir. 1991); Morgan v. United States, 937 F.2d 281, 284-86 (5th Cir. 1991) (per curiam); Williams v. United States, 931 F.2d 805, 810 (11th Cir. 1991); Hochstein v. United States, 900 F.2d 543, 546-49 (2d Cir. 1990); Quattrone Accountants, Inc. v. IRS, 895 F.2d 921, 927-28 (3d Cir. 1990); Collins v. United States, 848 F.2d 740, 742 (6th Cir. 1988).

4. Courts have found willful conduct by a responsible party even where payment of the taxes likely would have led to bankruptcy, see, e.g., Williams, 931 F.2d at 810-11; Hochstein, 900 F.2d at 548, Collins, 848 F.2d at 741-42, and even where such person acted under threat of adverse action by a superior or under direct instructions not to pay taxes owed, see, e.g., Morgan, 937 F.2d at 284; Gustin v. United States, 876 F.2d 485, 491-92 (5th Cir. 1989); compare Jay v. United States, 865 F.2d 1175 (10th Cir. 1989).

5. Most courts have held that the ultimate findings of responsibility and willfulness are themselves subject to review under the clearly erroneous standard. E.g., Donelan Phelps & Co. v. United States, 876 F.2d 1373, 1374 n.2 (8th Cir. 1989); Gustin v. United States, 876 F.2d 485, 491 (5th Cir. 1989). The Second Circuit, by contrast, has viewed such findings as involving mixed questions of law and fact; while reviewing the subsidiary fact findings for clear error, it accords plenary review to the "legal" conclusions of responsibility and willfulness. Hochstein, 900 F.2d at 546-47. Each approach yields the same result in the instant case.

6. The names of these nursing homes (and the names of the respective trusts, when different from that of the home) are as follows: (1) Exeter House Nursing Home; (2) Chester Manor Nursing Home; (3) Forest Manor Nursing Home; (4) Highland Avenue Nursing Home (Highland Nursing Home Trust); (5) Lakeview Nursing Home (Clinton Nursing Home Trust); (6) Parker Hill Nursing Home (Gardner Nursing Home Trust); and (7) Green Pastures Nursing Home (Marion Road Nursing Home Trust).

7. This anticipated benefit was not forthcoming in the instant case. On June 24, 1976, the Massachusetts Rate Setting Commission denied Almeida's petition for an adjustment in basis. Among the grounds cited for this ruling was that the sale "was not a bona fide transfer of all the powers and indicia of ownership."

8. In September 1976, Fay was indicted in Plymouth County on numerous counts of larceny of patients' funds and monies of the Department of Public Welfare. She pled guilty to three counts on October 3, 1977, and was sentenced to six months in prison (as mentioned, less than three months were served). Fines, costs, restitution and probation were also imposed. Fay also pled guilty during this time to a similar indictment in Suffolk County, receiving a concurrent prison term. On November 2, 1978, her probation was revoked for violation of the terms of probation and for contempt of court; she was returned to prison for an indeterminate sentence. See Fay v. Commonwealth, 379 Mass. 498 (1980).

9. This statement was presented by way of affidavit (as was the direct testimony of most witnesses) pursuant to the court's pretrial order. Boose reaffirmed this account during cross examination.

10. The court determined Fay to be "wholly incredible as a witness."

11. Boose indicated that another employee would place the calls and then put Fay on the line. Fay told Boose that, since she was "not supposed to be involved in the running of the nursing homes," such a procedure was a necessary precaution. There was additional evidence of attempts by Fay to camouflage her involvement in the homes. In interviewing several prospective employees, she employed the alias "Mary Plant."

12. The agreement referred to an affidavit submitted by Almeida which detailed the nature and extent of Fay's ongoing involvement. Because that affidavit was unavailable at trial, the court declined to rely on the agreement itself. Yet the court did credit Almeida's testimony in which he acknowledged having made this admission as part of the agreement.

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