USA v. Fowler
Filing
30
MEMORANDUM OPINION AND ORDER. The parties' motions for summary judgment, 12 & 16 , are denied without prejudice. The case will proceed to a bench trial on all three counts. An Amended Final Scheduling Order will issue. Signed by Chief Judge D. P. Marshall Jr. on 8/13/2020. (jak)
IN THE UNITED ST ATES DISTRICT COURT
EASTERN DISTRICT OF ARKANSAS
CENTRAL DIVISION
UNITED STATES OF AMERICA
PLAINTIFF
No. 4:18-cv-386-DPM
v.
PAUL FOWLER
DEFENDANT
MEMORANDUM OPINION AND ORDER
Was Paul Fowler, Inc., merely Paul Fowler's alter ego? That's the
issue presented by the parties' cross motions for summary judgment.
Fowler lays tile for a living. As he put it, "I'm a guy that just works on
my knees." Doc. 14-12 at 9. He did business through PFI between 2002
and roughly 2011.
PFI owes approximately $77,000 for unpaid
corporate income taxes for 2009 and 2010.
Fowler dissolved this
corporation in 2013, and now lays tile for MSK Enterprises, Inc., a
corporation wholly owned by his wife and named after their children's
initials. The United States has sued Fowler, seeking to collect the back
corporate taxes on three theories: veil piercing based on an alter ego
analysis; fraudulent transfer under ARK. CODE ANN.§§ 4-59-204 & 205;
or Arkansas's trust-fund doctrine. The second two theories depend on
how assets were handled in winding up PFI. They're hanging fire for
trial pending a ruling on the cross motions for judgment about PFI
supposedly being Fowler's second self.
Fowler is correct on an important background point-Arkansas
law controls whether PFI' s corporate veil should be pierced. United
States v. Scherping, 187 F.3d 796, 802 (8th Cir. 1999). He is mistaken,
though, about the applicable statute of limitations. Fowler probably
adequately pleaded this defense, albeit not explicitly, by asserting
generally all affirmative defenses listed in Federal Rule of Civil
Procedure 8(c). Doc. 3 at 3. He is mistaken on the merits of limitations
because federal law, not Arkansas law, controls that issue. United States
v. Wurdemann, 663 F.2d 50, 51 (8th Cir. 1981) (per curiam). And the
United States sued him in 2018, within the ten years of its 2009 and 2010
assessments of these unpaid taxes. 26 U.S.C. § 6502.
The corporate veil is thick. As Fowler emphasizes, precedent
admonishes that it should be pierced only with" great caution." Banks
v. Jones, 239 Ark. 396, 399, 390 S.W.2d 108, 110 (1965). The Arkansas
Supreme Court gathered and categorized many of the applicable cases
in Anderson v. Stewart, 366 Ark. 203, 206-09, 234 S.W.3d 295, 298-99
(2006).
Professor Goforth has helpfully discussed this law, too.
Carol R. Goforth, A Review of Piercing the Veil Cases in Arkansas,
2011 Ark. L. Notes 17. The canonical statement of the rule is, as a
matter of equity, a court should pierce the veil "when the corporate
form has been illegally abused to the injury of a third party." Anderson,
366 Ark. at 206, 234 S.W.3d at 298. The United States contends that
Fowler illegally abused PFI because the corporation didn't pay its
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income taxes, which injured the Treasury.
As commentators have
noted, the illegality criterion waxes and wanes in the precedent,
depending upon the whole of the circumstances. The Court agrees with
Professor Goforth' s conclusion that the Arkansas cases that allow
piercing are in three main camps - significant failure to observe
formalities, substantial undercapitalization, and evasion of legal
obligations - and often some combination of these circumstances.
Goforth, 2011 Ark L. Notes at 23.
Whether to pierce is a question of fact in Arkansas. Anderson,
366 Ark at 207, 234 S. W.3d at 298. Most of the appellate cases are thus
post-trial. The precedent's posture gives this Court pause. But, the
United States and Fowler have each asked for judgment as a matter of
law on whether PFI was merely his alter ego. Fowler does not dispute
any material fact asserted by the United States. While the United States
hedges on some of the material facts asserted by Fowler, almost all of
these points are in the nature of marginal clarifications. The Court will
therefore try to answer the alter ego question on the current record,
which includes tax returns, corporate records, bank statements, and the
depositions of Mr. and Mrs. Fowler.
Here are the material facts, stated most favorably to the
non-moving party where some material dispute exists. Smith-Bunge v.
Wisconsin Central, Ltd., 946 F.3d 420, 424 (8th Cir. 2019). The Fowlers
ran a "real simple business" where Mr. Fowler laid tile and Mrs. Fowler
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handled the records. Doc. 14-13 at 8. Jim Morris was Paul Fowler's tax
preparer from 1996 till 2008. He advised Mr. Fowler to incorporate his
tile business for tax purposes. Neither Morris nor anyone else told the
Fowlers to "separate Paul Fowler, Inc. from Paul Fowler." Doc. 14-12
at 13. Paul Fowler continued to run his business out of his home and
use his personal trucks and tools for PFI. This was done without any
type of rental agreement between himself and the corporation. He was
PFI' s lone shareholder. The corporation paid its state franchise taxes.
But PFI never held a board meeting or shareholder's meeting. And the
Fowlers mixed business and personal expenses:
they paid their
mortgage, cellphone, life insurance, groceries, and some fast-food costs
out of PFI bank accounts. All receipts went into the proverbial shoebox.
At the end of every year, Mrs. Fowler would go "line by line" over the
bank statements, and go through all the receipts in the shoebox,
separating what was what, and then giving all the information to
Morris to figure out the taxes. Doc. 14-13 at 7 & 11. The PFI money that
paid personal expenses was classified as a draw on the corporation.
Between 2002 and 2008, Morris lied to the Fowlers about what PFI
owed in taxes. (Morris was convicted by a jury in 2011 for many crimes,
including causing others to file false tax returns. United States v. Morris,
No. 4:10-cr-90-SWW-1, Doc. 91 (E.D.Ark. 29 February 2012).). PFI, it
turned out, was badly delinquent in its taxes. With the help of counsel,
and a new tax preparer, the Fowlers started addressing the situation in
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2009. After sorting things with the United States, the Fowlers "got rid
of everything" to pay more than $75,000 in back taxes, penalties, and
fees. Doc. 17 at 4; Doc. 14-13 at 20. The Fowlers stopped using PFI for
their tile business sometime in 2011 and formally dissolved the
corporation in 2013. They thought they were out of the woods, but the
United States says that PFI still owes roughly $77,000 in taxes for the
2009 and 2010 tax years.
The United States contends that, as a matter of law, the Fowlers'
loose business practices add up to abuse of the corporate form to avoid
their tax obligations. The Court disagrees. When a corporation tries to
evade taxes, or not comply with its federal or state obligations, the veil
can be pierced. Anderson, 366 Ark. at 207,234 S.W.3d at 298. The United
States qualifies as an injured third party. But fraud or deception is also
"generally involved" in the Arkansas cases that approve piercing. Ibid.
This record doesn't demonstrate fraud or deception. It demonstrates
very loose business practices. Mr. and Mrs. Fowler testified at length
about how they took Morris at his word. He never advised them to
keep things separate, have agreements between Paul Fowler and PFI,
hold corporate meetings, elect officers, and prepare minutes.
And
when the truth came out about Morris and the taxes, the Fowlers got
counsel and a new tax advisor, paying what they believed was owed.
The record made so far contains no conclusive evidence that the
Fowlers set up PFI, or operated it, simply as a sham to deprive the
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government of revenue unjustly. The equity, for example, pulled the
other way in Humphries v. Bray, 271 Ark. 962, 966-67, 611 S.W.2d 791,
793 (1981), where three intertwined businesses were held to be one for
workers' compensation coverage purposes.
The deep issue, as the Court sees it, is PFI' s last years - how the
winding up was done.
This is one of those cases that turns on a
combination of all the circumstances - looseness in formalities plus
possible evasion of legal obligations, through some fraud, deception, or
illegality.
The many shortcomings in the formalities here are not
enough alone to support a judgment. Whether the United States can
prevail on the alter ego theory depends instead on the Fowlers'
purposes and actions in the wind-up, just as do the United States'
fraudulent-transfer and trust-fund-doctrine theories. To decide where
the equity is, the Court must discern the Fowlers' intentions. And that
is best done after a trial, as illustrated by the precedent. E.g., Anderson,
366 Ark. at 205,234 S.W.3d at 297.
*
*
*
The parties' motions for summary judgment, Doc. 12 & 16, are
denied without prejudice. The case will proceed to a bench trial on all
three counts. An Amend Final Scheduling Order will issue.
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So Ordered.
D .P. Marshall Jr.
United States District Judge
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