Bradbury v. USA
ORDER: The United States' 49 Motion for Summary Judgment on its counterclaim and on Bradbury's complaint is mostly granted. It is denied without prejudice on the precise amount of the penalty. Bradbury's 52 Motion for Summary Judgm ent is denied. His claim for a refund and abatement of the penalty fails as a matter of law. The Court would appreciate a stipulation, or a renewed motion targeted solely at all the numbers by 25 April 2014. 70 Motion in Limine is denied as moot. Signed by Judge D. P. Marshall Jr. on 3/24/2014. (jak)
IN THE UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF ARKANSAS
UNITED STATES OF AMERICA
1. Summary. Every employer must withhold income, Social Security,
and Medicare taxes from its employees' wages, hold the money in trust, and
then pay it periodically to the United States. 26 U.S.C. §§ 3102(a), 3402(a),
7501. The demise of Continental Express, Inc., a trucking company, and its
sister entity, Arkansas Trucking, Inc., has resulted in questions about who's
responsible for some withheld but unremitted payroll taxes. The United
States wants Ralph Bradbury, Continental's former president, to pay the taxes.
It says he was responsible for making sure the withholdings were paid over
to the government and willfully failed to do so. 26 U.S. C.§ 6672(a). The IRS
assessed the amount owed, which the statute calls a penalty, against
Bradbury. After the IRS withheld some tax refunds otherwise due him,
Bradbury filed this case to recover the refunds and abate the penalty. The
United States has counterclaimed to reduce the assessment to judgment.
Bradbury argues that he did the best he could as Continental and
Arkansas Trucking failed around him. He says Bonnie Harvey, one of
Continental's owners, promised repeatedly to recapitalize the company, but
never did. He also says she and her consultant, Marvin Jones, told him these
taxes would be paid. He contends that, by the third quarter of 2008, Harvey
and Jones were as much, or more, in control of the plight of
Continental/ Arkansas Trucking as he was. He points out that lots of other
creditors got paid in the sale and business wind up-while he was, he says,
left hanging on the clothesline about these payroll taxes.
The United States argues that these surrounding circumstances are
immaterial: because Bradbury was a responsible person during the third
quarter; and because he knew other bills were being paid then, but the
withholdings were not, his actions were willful within the statute's meaning.
Therefore, argues the Government, Bradbury must satisfy this obligation now.
The parties have filed cross motions for summary judgment. Many of
the material facts are undisputed. Where there is some dispute, the Court will
take the facts in the light most favorable to Bradbury on the Government's
motion and vice versa. Breitkreutz v. Cambrex Charles City, Inc., 450 F.3d 780,
781 (8th Cir. 2006).
The United States' motion is mostly granted and
Bradbury's motion is denied.
2. The Facts. Arkansas Trucking "leased" employees exclusively to
Continental. NQ 76 at 1 4; NQ 65 at 114. There was no daylight between the
Arkansas Trucking maintained no separate office or
corporate leadership. NQ 76 at 1 11-12. Ed Harvey was the president on
paper. NQ 65 at 1 13. Arkansas Trucking had no assets of its own and relied
on money from Continental to pay for everything, including employee
salaries and its tax obligations. NQ 76 at 113-14. Arkansas Trucking's bank
accounts were funded by Continental's operating account. NQ 76 at 1 23.
While experiencing financial difficulties in the third quarter of 2008,
Arkansas Trucking failed to make federal employment tax deposits on its
employees' wages. N!! 76 at 11 142, 146, 156-58, 174, 179, 211-12. It made
payments to other creditors during this period. NQ 76 at 1 205.
Ed and Bonnie Harvey were the sole shareholders of Continental; he
was the sole shareholder of Arkansas Trucking. NQ 65 at 1112-13. During the
summer of 2008, Bonnie Harvey hired Marvin Jones to serve as a consultant.
NQ 65 at 131. The parties dispute the reasons why Jones was hired and the
extent of his control over Continental's finances and future. NQ 65 at~ 31-32.
In July 2008, Continental changed CFOs. NQ 76 at~ 143.
Bradbury exercised authority at both Continental and Arkansas
Trucking during the third quarter of 2008. At Continental, he served as
president and was a member of Continental's board of directors. NQ 76 at
All of the managers at Continental ultimately reported to him. NQ 76
at ~ 38. Bradbury managed day-to-day operations and had the authority to
hire and fire employees. Ng 76 at
39-40. He had the authority to sign
checks from all three Continental bank accounts and to authorize his staff to
make payments from the accounts. NQ 76 at
32-33. He never initiated
checks; he relied on his management team to put them on his desk for review
and signature. Ng 50-19 atpp. 39-41 (examination pagination) 1; NQ 50-20 at pp.
115-17 (deposition pagination). Bradbury also had the authority to bind
Continental to contracts with major suppliers. NQ 76
NQ 50-19 is a transcript of Bradbury's sworn examination by the
United States' counsel. All page citations use the examination's
pagination. NQ 50-20 is a transcript of Bradbury's deposition. All page
citations use the deposition's pagination.
At Arkansas Trucking, Bradbury was responsible for opening the
company's three bank accounts and authorizing payments from those
accounts. NQ 76 at 'j['j[27, 30-32. He had the authority to sign checks and had
some control over who had signature authority. NQ 76 at
'if'il 28-29, 152.
Bradbury's salary came from Arkansas Trucking. NQ 76 at 'j[60.
Bradbury also possessed significant authority in tax matters involving
Arkansas Trucking and Continental. He had the authority to require his staff
to report to him when federal employment taxes became due. NQ 76 at 'j['j[98,
141. He also had the authority to instruct his staff to ensure that federal
employment taxes were paid before any other creditor. Ng 76 at 'j['j[184, 213.
When Arkansas Trucking failed to meet its employment tax obligations in
July 2008, the revenue officer was sent to Bradbury. NQ 76 at 'j[131-32. This
was Bradbury's first direct involvement with tax issues. NQ 50-19 at 69. He
took responsibility for getting this tax obligation paid, approving his staff's
idea to use Continental's American Express card to pay the IRS immediately.
Ibid; Ng 76 at 'j['j[133-34.
In early September 2008, Bradbury again received notice of Arkansas
Trucking's failure to pay its federal employment taxes. NQ 76 at 'j[185. He
ordered his staff to keep him informed of any future federal employment tax
deposits. NQ 76 at ,-r 190. He told them, "this can't continue." NQ 76 at ,-r 191.
When his staff told him that the delinquency had to be paid by early
November, Bradbury instructed them to pay. "I said, boys, that's what you
got to do, so make sure it happens." NQ 50-19 at p. 70.
The parties dispute what else happened after Bradbury discovered the
unpaid third quarter taxes. Here is Bradbury's version. He says he told
Bonnie Harvey and Marvin Jones in early September about the
delinquency- he "went over there with [his] hat in [his] hand and begged for
money." NQ 65 at ,-r 33; NQ 50-19 at pp. 82-83. Harvey and Jones told him they
"would see what they could do about getting some cash into the company."
NQ 50-19 atp. 79. Thereafter, Jones took over check-signing authority and the
priority of payments. NQ 62-1 at 8; N2 50-19 at pp. 85-87. Bradbury had to get
prior approval before he could sign any significant check. NQ 62-1 at 7. And
starting in October, all the checks Bradbury signed went to Jones's basket for
approval; no check was released without Jones's OK. NQ 50-19 at pp. 85-87,
100-01. Bradbury reminded Jones on a daily basis that the delinquent taxes
had to be paid by 5 November 2008. NQ 62-1 at 8; NQ 50-19 at p. 96. Jones and
Harvey repeatedly assured Bradbury that they would be paid, but they never
were. N!! 65 at -,r-,r 34. Jones also told Bradbury that he Ganes) had contacted
the IRS and handled everything directly with the Service. N!! 50-19 at pp. 95,
97. At this point, Bradbury says his only alternative was an unrealistic one:
sneaking a check out of the checkbook and writing it to the IRS, not knowing
what the cash flow would be. N!! 50-19 at pp. 97, 106.
The United States says Harvey and Jones found out about the taxes in
October or early November. N!! 65 at -,r 33. It disputes that Harvey or Jones
assured Bradbury the taxes would be paid or did anything to prevent
payment. N!! 65 at -,r-,r 33-35. The Government says neither Jones nor Harvey
had check-signing authority and that Bradbury retained this authority and
continued to sign checks to other creditors through December 2008. N!! 65 at
21. The United States emphasizes that the bank records show that Jones
didn't have check-signing authority until December 2008, and that neither of
the Harveys had check-signing authority on Continental/ Arkansas Trucking
accounts. N!!s 50-3, 50-4,50-9,50-10, & 50-11.
Bonnie Harvey sold Continental on 4 December 2008- the day before
the IRS was to issue its thirty-day letter giving notice that it would be seizing
Continental's assets. N!! 65 at~ 37; N2 68 at 6. Bradbury says he was unaware
the company was to be sold until the last minute. N!! 68 at 5-6; N!! 50-20 at pp.
20 7-09. The sale was, according to Bradbury, part of a larger asset-protection
plan to reduce the Harveys' personal liability and avoid debts as Continental
started to crumble. N!! 53 at 7-8; N!! 65 at~ 36. Bradbury says that, as part of
the plan and before the sale, Bonnie Harvey and Jones had moved significant
assets away from Continental and made preferential payments to the
Harveys' other companies. Ibid. Bradbury emphasizes that Continental's
cash-flow difficulties also resulted from equipment-related embezzlement by
his predecessor and a lawsuit involving a truck accident- problems Bradbury
had to solve, and did solve, but which ended up costing more than eleven
million dollars. N!! 50-20 at pp. 175-77.
In August 2011, the IRS assessed a penalty against Bradbury for
Arkansas Trucking's unpaid employment taxes for the third quarter of 2008.
N2 76 at
In April 2012, and apparently at the direction of the
Department of Justice, the IRS made a proposed assessment for these taxes
against Bonnie Harvey and Marvin Jones. N!! 65
45. But the Service
eventually issued a clearance letter and made no assessment against either
Harvey or Jones. Ibid. The IRS also assessed the penalty against one of
Continental's CFOs, Rick Acklin, and named him in this case; Acklin has been
dismissed by agreement. NQ 84.
3. Responsible-Person Status.
Is Bradbury personally liable for
Arkansas Trucking's unpaid employment taxes for the third quarter of 2008?
It depends on whether he was responsible for paying over the taxes to the
government and willfully failed to do so. 26 U.S.C. § 6672. Bradbury was a
"responsible person" if he "ha[ d] the status, duty[,] and authority to avoid the
corporation'sdefaultincollectionorpaymentof the taxes." Ferguson v. United
States,484 F.3d 1068,1072 (8th Cir. 2007). Considering all the facts about July,
August, and September 2008, the record shows that Bradbury was a
responsible person. Arkansas Trucking and Continental were so intertwined
that Bradbury's authority at one overlapped with his authority at the other.
When evaluating responsible-person status, courts often look to a list of
criteria. Oppliger v. United States, 637 F.3d 889,893 (8th Cir. 2011). Bradbury
satisfies most of them. He served as Continental's president and on its board
NQ 76 at
1-2. He managed day-to-day operations and
possessed the authority to hire or fire employees. Ng 76 at ,-r,-r 39-40. He had
check-signing authority at accounts belonging to both Continental and
Arkansas Trucking and used it regularly. NQ 76 at 1129, 32, 152; NQ 50-20 at
p. 46. He evaluated checks' validity before signing them. NQ 50-20 at p. 116.
He would, for instance, look to see how much the checks were for and to
whom they were made out; if a check seemed "funny," or "improper," he
would seek an explanation. NQ 50-20 at p. 117-19. He also could and did
authorize payments from Continental and Arkansas Trucking accounts.
NQ 76 at 11 30, 33-34; NQ 50-19 at p.70. During the third quarter of 2008,
Bradbury approved payments to other creditors. For instance, he signed
Arkansas Trucking checks paying state en1ployment taxes. NQ 76 at 1128. He
also signed Arkansas Trucking checks paying both truck drivers and office
employees. NQ 76 at 1 150, 152. Bradbury reviewed Continental's expenses
and questioned Continental's CFO when he wanted to know what an expense
was for and why it had been approved. Ng 76 at
All of these
undisputed facts indicate that, notwithstanding his contention that real power
had passed from his hands to Bonnie Harvey and Marvin Jones, Bradbury
possessed more than mere check-signing authority during the third quarter
of 2008. NQ 53 at 6-7.
In addition to corporate status, Bradbury must have had "significant,
though not exclusive, authority in . . . matters related to federal tax
payments." Kenagy v. United States,942 F.2d 459,464 (8th Cir. 1991). He did.
Bradbury could require his staff to report to him when federal employment
taxes became due. Ng 76 at ~~98, 141. He had the authority to ensure federal
employment taxes were paid before any other creditor. NQ 76 at~~ 184, 213.
When Arkansas Trucking failed to meet its employment tax obligations in
July 2008, the revenue officer spoke to Bradbury. Ng 76 at~ 131-32. Bradbury
instructed his staff to pay the debt, and it was paid by the deadline. Ng 76 at
133-36. Bradbury didn't tell Jones or the Harveys about this $25,000.00
payment, and he didn't seek their approval to make it. N!! 50-19 at p. 91.
When Bradbury found out about unpaid federal employment tax deposits in
early September, he ordered his staff to inform him of all future deposits.
Ng 76 at~~ 185, 190-91. He also directed them to get the taxes paid before the
November deadline. N!! 50-19 at p. 70. Construing these facts in the light most
favorable to Bradbury, no reasonable juror could conclude that Bradbury
lacked significant tax-paying authority.
Bradbury argues that his corporate status and tax-paying authority were
overshadowed by Bonnie Harvey's and Jones's eventual complete control
over the financial affairs of Continental and Arkansas Trucking. NQ 53 at 7;
According to Bradbury, in July, August, and September 2008,
Harvey and Jones implemented a plan to avoid debts and claims from
creditors by taking these steps:
transferring all of Ed Harvey's assets to Bonnie Harvey, NQ 65 at
making the decision to sell Continental, knowing that Arkansas
Trucking owed federal employments taxes, NQ 65 at ~ 38; and
ignoring Bradbury's repeated requests to pay the delinquent taxes
and preventing payment by withholding a promised cash
infusion, NQ 53 at 7 & Ng 65 at ~ 35.
Taking the genuinely disputed facts in the light most favorable to Bradbury,
the circumstances do not alter Bradbury's responsibility in law to see that the
taxes were paid. More than one person may be a responsible person under
the statute. Keller v. United States, 46 F.3d 851, 854 (8th Cir. 1995). The
precedent is harsh but clear: whether difficult circumstances come from above
or below, they usually do not change a responsible person's status.
In Ferguson, for example, the CFO /COO argued that the board of
directors instructed him not to pay the taxes. But "even if the Board's
directive could be construed as an instruction not to pay the taxes, such
instructions do not take a person otherwise responsible under section 66 72(a)
out of that category." 484 F.3d at 1073 (quotation omitted); see also Greenberg
v. United States, 46 F.3d 239, 243-44 (3rd Cir. 1994)(collecting cases). In other
cases, difficulties created by underlings obstructed paying the taxes. Colosimo
United States, 630 F.3d 749, 752-53 (8th Cir. 2011)(corporate
president/treasurer duped by bookkeeper); Oppliger, 637 F.3d at 891, 893
(embezzling accountant deprived corporate officers of information and
opportunity to make informed decisions).
The Third Circuit's decision in Greenberg is factually close and illustrates
the law's strictness. See Ferguson, 484 F.3d at 1073 (relying on Greenberg).
Greenberg was a controller, who had check-signing authority, but had to get
the CEO /board chairman's prior approval for all checks. Their company,like
Continental and Arkansas Trucking, encountered financial difficulties. 46
F.3d at 240-41. The controller, like Bradbury, had lots of authority over the
business, its employees, and its finances. 46 F.3d at 243-44. The CEO, like
Jones, had the final say about which creditors got paid and which did not. 46
F.3d at 241, 243. The CEO assured the controller, like Jones and Harvey
assured Bradbury, that the federal taxes due would be paid. 46 F.3d at 241.
The controller, like Bradbury, could have written and sent a check to the IRS
without approval, but it probably would have bounced and he likely would
have been fired. 46 F.3d at 241, 244.
The Court of Appeals held as a matter of law, over a dissent, that the
controller was a responsible person who willfully failed to pay the taxes.
While not binding, the Third Circuit's decision is persuasive. The difficult
financial circumstances and constraining oversight faced by Greenberg were
substantially similar to what Bradbury says he faced during the last days of
Continental/ Arkansas Trucking.
As the Court reads the cases as a whole, their principle is this: Unless
the obstructions to paying the taxes were so significant that a reasonable juror
could conclude that a person had essentially been deprived of the authority
making him responsible in the first place, the practical difficulties of making
payment cannot absolve a responsible person of liability. As the dissent in
Greenberg emphasized, the core issue is how much authority the allegedly
responsible person possessed, recognizing that having the ultimate say is not
required. 46 F.3d at 245-46; see also United States v. Bisbee, 245 F.3d 1001,
1007-08 (8th Cir. 2001). Bradbury's significant financial and tax-related
authority in the third quarter of 2008 is established by the undisputed facts of
record. Harvey and Jones's actions, taken in the light most favorable to
Bradbury, do not create a fact issue about his status. Bradbury continued,
notwithstanding the companies' deteriorating finances and tightening
oversight by Jones, to run Continental/ Arkansas Trucking and to sign checks
paying other bills. And the federal taxes were not paid over.
4. Willfulness. A responsible person does not have to act with any bad
intent or evil motive in order to act willfully within the meaning of§ 6672. He
acts willfully" whenever he acts or fails to act consciously and voluntarily and
with knowledge or intent that as a result of his action or inaction trust funds
belonging to the government will not be paid over but will be used for other
purposes[.]" Honey v. United States, 963 F.2d 1083, 1087 (8th Cir. 1992)
(quotation omitted). Or a responsible person may act willfully by proceeding
"with a reckless disregard of a known or obvious risk that trust funds may
not be remitted to the government." Ibid. Willfulness is generally a fact
question. Colosimo, 630 F.3d at 753. But "if a responsible person knew of
payments to other creditors after he was aware of the failure to pay over
withholding taxes to the government, his actions are willful as a matter of
law." Ibid. Here again, the precedent strongly favors the United States.
Bradbury must offer proof of a negative- that he did not willfully fail to pay
the employment taxes. Olsen v. United States, 952 F.2d 236,239 (8th Cir. 1991).
Construing the facts in the light most favorable to Bradbury, no jury
question exists. Bradbury says he took reasonable measures to ensure that the
taxes were paid and made repeated requests and attempts to pay the taxes.
N!l 53 at 8-10; N!l 62-1 at 8; N!l 65 at, 35. He says he ordered his staff to pay
the unpaid taxes before paying other creditors. Ng 65 at ,35; see also NQ 50-19
atp. 70. He says his efforts were obstructed by Bonnie Harvey and Jones, who
effectively prevented payment. NQ 65 at, 35. Bradbury disputes that he
approved the checks that paid other creditors during the third quarter. N!l 76
at,, 149, 151, 153, 206, 208. But the record is clear that Bradbury knew two
essential facts in September: the taxes were delinquent; and other creditors
were getting paid nonetheless. NQ 50-19 at pp. 84-90.
First, some history. Bradbury was aware as early as February 2008 that
Arkansas Trucking had not made its federal tax deposits. NQ 76 at~~ 85-89.
Bradbury says he assumed this delinquency got sorted out because he "never
heard anything else about it." NQ 50-20 at p. 237.
Second, there were the events in the summer months. On 14 July 2008,
Bradbury signed checks to pay state employment taxes out of Arkansas
Trucking's operating account. NQ 50-4 at 17; Ng 50-20 at p. 70. A few days
later, the IRS contacted Bradbury about additional unpaid federal tax
deposits. Ng 76 at~~ 131-32; Ng 50-20 at p. 260. Bradbury got the $25,000.00
demanded paid by 21 July 2008. NQ 50-19 at p. 75. On 25 July 2008, Bradbury
signed checks from Arkansas Trucking's account to pay office employees. Ng
76 at~ 152. He says he knew Arkansas Trucking and Continental were" cash
tight," but believed after the $25,000.00 payment that the companies were
"current at that time" on the federal withholding.
Ng 50-19 at pp. 72-75.
On 15 August 2008, Bradbury signed checks to pay state employment taxes
out of Arkansas Trucking's operating account. Ng 50-4 at 18; NQ 50-20 at p. 71.
If the facts stopped here, the current record, taken in the light most
favorable to Bradbury, might present a jury question on willfulness. The
United States has not established that Bradbury knew in late July or August,
when he signed other checks, that the companies' federal withholdings were
going unpaid. But the undisputed facts about September provide only one
Third, September. Early in the month, Bradbury's management team
informed him of additional unpaid federal tax deposits. NQ 76 at ~~ 185-86.
The delinquency was approximately $800,000.00. NQ 50-19 at p. 78; NQ 50-20
at p. 275. Bradbury ordered payment and informed Jones and Harvey on 3
September 2008. Ng 50-19 at p. 70, 78-79. He says he reminded Jones
thereafter on a daily basis that the taxes had to be paid by 5 November 2008.
NQ 62-1 at 8; Ng 50-19 at pp. 95-99. On 15 September 2008, Bradbury signed
checks to pay state employment taxes out of Arkansas Trucking's accounts
payable account. NQ 76 at~ 128; NQ 50-4 at 19.
Fourth, there are the events in October and November. Bradbury says
he also signed checks on 13 October 2008. NQ 50-20 at pp. 72-73. When the
November deadline passed, he suspected that the federal taxes hadn't been
paid, but did nothing else. NQ 50-19 at p. 97. He says he "didn't feel at all
responsible at that time." NQ 50-19 at p. 105. On 12 November 2008, Bradbury
says he signed another check. NQ 50-20 at p. 73. He didn't find out for sure
that the taxes hadn't been paid until late November when Continental's CFO
approached him about it. NQ 50-19 at pp. 106-07.
In summary, Bradbury signed checks to other creditors in July, August,
and September 2008. He has acknowledged three times under oath that he
knew other creditors were getting paid during those months. NQ 50-19 at pp.
76, 84, 89. He knew when he signed the September check for the Arkansas
withholdings that the federal withholdings were delinquent. The history,
both before September and after, illuminates the circumstances at Continental
and Arkansas Trucking. September, though, is dispositive. Knowing of the
substantial unpaid federal obligation, Bradbury signed the check paying the
State tax obligation. This September payment predated October 2008, when
Bradbury says all checks were subject to Jones's veto. Bradbury's reliance on
others' assurances that the federal taxes would be paid eventually, though
understandable, cannot overcome his undisputed knowledge that these taxes
were delinquent when he signed a check to another creditor. He therefore
acted willfully as a matter of law- within the statute's meaning as construed
by binding precedent-in failing to pay over the federal withholding taxes.
E.g., Colosimo, 630 F.3d at 753.
5. Amount of the Penalty and Interest. The United States also seeks
summary judgment on the precise amount of the penalty Bradbury owes.
NQ 51 at 18; NQ 66 at 18-19. He does not respond, though he acknowledges
that the assessment was made. N!! 76
217. This aspect of the motion
raises complicated factual issues about the interest currently accruing on the
penalty and which payments were applied to liabilities from which quarter.
See NQ 69 at~~ 14-19. The record is neither developed nor argued adequately
on all of this. This part of the United States' motion is therefore denied
Bradbury was a responsible person as a matter of law. He also acted
willfully as a matter of law in failing to pay over Arkansas Trucking's payroll
taxes. The United States' motion for summary judgment on its counterclaim
and on Bradbury's complaint, NQ 49, is mostly granted and denied without
prejudice on the precise amount of the penalty. Because the United States is
entitled to judgment based on the material facts, both undisputed and taken
in Bradbury's favor where disputes exist, Bradbury's motion for summary
judgment, NQ 52, is denied. His claim for a refund and abatement of the
penalty fails as a matter of law. The Court would appreciate a stipulation, or
a renewed motion targeted solely at all the numbers, by 25 April 2014.
Motion in limine, NQ 70, denied as moot.
D.P. Marshall Jr.
United States District Judge
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