Shore v United States of America

Filing 30

MEMORANDUM DECISION AND ORDER. IT IS HEREBY ORDERED that Defendant United States' Motion for Summary Judgment 20 is GRANTED. Signed by Judge Edward J. Lodge. (caused to be mailed to non Registered Participants at the addresses listed on the Notice of Electronic Filing (NEF) by (st)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO

WILLIAM R. SHORE,

Case No. 1:13-CV-220-EJL-REB
Plaintiff,

vs.
UNITED STATE OF AMERICA,
(Internal Revenue Service)

MEMORANDUM DEICISION AND
ORDER

Defendant.

Plaintiff filed this action after paying the amount allegedly due under a trust fund
recovery penalty for unpaid payroll withholding taxes for Bear River Equipment, Inc.
(“BRE”), assessed against him pursuant to 26 U.S.C. § 6672. Plaintiff seeks a refund of
employee payroll taxes and penalties he was required to submit for seven tax periods in
2006 and 2007. This matter is before the Court on the Motion for Summary Judgment
filed by Defendant United States of America. (Dkt. 20.)
The parties have submitted their briefing on the motion and the matter is now ripe
for the Court’s review. Having fully reviewed the record herein, the Court finds that the
facts and legal arguments are adequately presented in the briefs and record. Accordingly,
in the interest of avoiding further delay, and because the Court conclusively finds that the
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decisional process would not be significantly aided by oral argument, the motions shall
be decided on the record before this Court without oral argument. For the following
reasons, the Court will grant Defendant’s motion for summary judgment.
I.

Facts

Plaintiff William Shore (“Shore”) owned real property (the “property”) he leased
to Countryside Repair & Equipment (“Countryside”), a farm equipment seller, until late
2004, when Countryside closed. At the time Countryside ended its lease with Shore, a
representative for McCormick Tractors, a line of tractors sold by Countryside, proposed
that Shore start his own business on the property and become a McCormick dealer.
Shore was initially uninterested in starting a business because he was retired and lived far
away from the property. The McCormick dealer then suggested the manager of
Countryside, Tom Lewis (“Lewis”), had 25 years of experience buying and selling
tractors, and could run the business for Shore.
Shore met with Lewis and ultimately decided to form BRE. Shore and Lewis
verbally agreed that Lewis would run the business and would have the option to purchase
the business at any time by repaying Shore’s initial $150,000 investment in the company
with interest. Although they did not sign any agreements or formally memorialize any
terms, both Shore and Lewis believed that Lewis would eventually purchase BRE.
Pursuant to their verbal agreement, Shore hired Lewis to manage every aspect of
the business, including day to day operations, financial management, purchasing of
product lines, paying all of BRE’s bills, and other duties required to run an equipment

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sales business.1 Lewis was responsible for supervising, hiring and firing employees, as
well as for submitting all tax forms for BRE and paying its payroll taxes. Shore viewed
his role in BRE as an investor, and essentially treated the company as if it belonged to
Lewis. Lewis and his wife, Maureen Lewis, also treated BRE as their own company, and
held themselves out to others, such as an accountant they hired to work for BRE, as the
owners of the company. However, Lewis never exercised the option to purchase BRE.
While Shore played a very limited role in the operation of BRE, he signed the
Articles of Incorporation as President of BRE, owned all of the shares in BRE,2 signed
various contracts on behalf of BRE as its president,3 and personally guaranteed an
operating line of credit eventually obtained by BRE from Ireland Bank.4 Shore had
telephone calls with Lewis once or twice a month to discuss operations at BRE,5 and
made quarterly visits to BRE to check inventory and generally assess the business.6

1

 BRE

did not have any by-laws or minutes from meetings documenting who the elected
officers of the corporation were or what respective authority Shore or Lewis had.
2
When BRE was formed in 2005, Shore and his then wife, Roberta Shore each owned
50% of the company. After Shore and Roberta divorced in 2006, Shore owned all of the
shares in BRE. (Dkt. 20-1, ¶ 2.)

3

Such agreements included an Inventory Security Agreement with Agricredit Acceptance
LLC, an Inventory Financing Agreement with GE Commercial Distribution Finance
Corporation, a Dealership Agreement and Security Agreement with MacDon Industries
Ltd., and a Retail Distributor Agreement and Security with McCormick International
U.S.A. Inc. (Dkt. 20-1, ¶¶ 11-14.) Shore personally guaranteed BRE’s obligations to
each of the aforementioned entities. (Id.)

4

(Id., ¶15.)

5

(Dkt. 22-2, “Shore Deposition,” pp. 53-56.)

6

 (Id.,

pp. 65-66.) 

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Shore also reviewed balance sheets and annual statements Lewis sent him for BRE.7
Prior to incurring the payroll tax liability at issue in this suit, Shore noticed and directed
Lewis to satisfy unpaid payroll obligations from 2005.8 Shore ensured Lewis paid the
payroll obligations from 2005 by the January 2006 deadline. 9 Finally, Shore had
authority to sign checks on the Ireland Bank account, though he did not write any checks
on the account, and was listed on the Ireland Bank check signature card as “owner” of
BRE.
In August 2007, Shore received notice from an Internal Revenue Service Agent
that there were some serious issues with BRE’s employment taxes for 2006 and 2007.
This notice was the first time Shore became aware that BRE’s 2006 and 2007 payroll
taxes had not been paid. Shore subsequently learned that Lewis had been embezzling
from BRE, failing to pay creditors or pay BRE’s taxes, and stealing BRE’s assets. Upon
discovering Lewis’ fraud, Shore fired Lewis and took over management of BRE.10 Shore

7

 (Id.,

pp. 42, 61, 68-70.) Shore later learned such financial statements were false. (Id.)

8

(Id., pp. 63-65, 76, 77-79.)

9

(Id.)

10

In his summary judgment papers, Shore claims that he did not fire Lewis and that
Lewis instead quit, and suggests that whether he had the authority to hire and fire
employees is thus a genuine issue of fact precluding summary judgment. (Dkt. 22, pp.
11, 19.) However, Shore alleged in his complaint that he removed Lewis (Dkt. 1, ¶53),
and also confirmed that he fired Lewis in his deposition. (Shore Deposition, pp. 90, 133134.) Statements in a party’s pleadings are conclusively binding on that party. American
Title Ins. Co. v. Lacelaw Corp., 861 F.2d 224, 226 (9th Cir. 1988). Moreover, a party
cannot create a genuine issue of material fact by contradicting their own prior testimony.
Kennedy v. Allied Mut. Ins. Co., 952 F.2d 262, 266 (9th Cir. 1991).
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ultimately decided to close BRE because he believed he could not pay all of the liabilities
and contribute sufficient working capital to keep the company going.11 Before closing
the company, however, Shore allowed more than $120,000 from BRE’s checking
accounts to be paid to unsecured creditors other than the United States. Although Shore
believed he should not be held liable for BRE’s unpaid payroll taxes because he was not a
responsible party and did not willfully ignore tax obligations, Shore ultimately paid
$101,583.09 in trust fund recovery penalties to the United States, and later filed the
instant suit to obtain a refund.

II.

Discussion

A. Standard of Review
Summary judgment is appropriate where a party can show that, as to any claim or
defense, “there is no genuine dispute as to any material fact and the movant is entitled to
judgment as a matter of law.” Fed.R.Civ.P. 56(a). One of the principal purposes of the
summary judgment rule “is to isolate and dispose of factually unsupported claims or
defenses.” Celotex Corp. v. Catrett, 477 U.S. 317, 323–24 (1986). It is not “a disfavored
procedural shortcut,” but is instead the “principal tool[ ] by which factually insufficient
claims or defenses [can] be isolated and prevented from going to trial with the attendant
unwarranted consumption of public and private resources.” Id. at 327.
“[T]he mere existence of some alleged factual dispute between the parties will not
defeat an otherwise properly supported motion for summary judgment; the requirement is

11

(Shore Deposition, pp. 17, 154.) 

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that there be no genuine issue of material fact.” Anderson v. Liberty Lobby, Inc., 477 U.S.
242, 247–48 (1986) (emphasis in original). Material facts are those “that might affect the
outcome of the suit.” Id. at 248. “Disputes over irrelevant or unnecessary facts will not
preclude a grant of summary judgment.” T.W. Elec. Serv., Inc. v. Pac. Elec. Contractors
Ass’n, 809 F.2d 626, 630 (9th Cir.1987).
The moving party is entitled to summary judgment if that party shows that each
material fact cannot be disputed. To show that the material facts are not in dispute, a
party may cite to particular parts of materials in the record, or show that the adverse party
is unable to produce admissible evidence to support the fact. Fed.R.Civ.P. 56(c)(1)(A) &
(B). If the moving party meets its initial responsibility, then the burden shifts to the
opposing party to establish that a genuine dispute as to any material fact actually does
exist. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986).
When making the summary judgment determination, the court must view the evidence,
and all justifiable inferences from the evidence, in the light most favorable to the nonmoving party. T.W. Elec. Serv., Inc., 809 F.2d at 630–31.

B. Liability under 26 U.S.C. § 6672
The Internal Revenue Code requires employers to withhold federal income and
social security taxes from the wages of their employees. See 26 U.S.C. §§ 3102(a),
3402(a). The employer holds the withheld taxes “in trust” for the United States and must
pay them over to the government on a quarterly basis. 26 U.S.C. § 7501(a). The
withheld amounts are known as trust fund taxes. Davis v. United States, 961 F.2d 867,
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869 (9th Cir. 1992). If an employer withholds the taxes from its employees but fails to
remit them, the government must nevertheless credit the employees for having paid the
taxes, and seek the unpaid funds from the employer. Id. Under 26 U.S.C. § 6672(a), the
IRS may assess a 100% penalty on responsible persons who willfully fail to collect,
account for, and pay over the taxes to the United States.12 United States v. Jones, 33 F.3d
1137, 1138 (9th Cir. 1994).
In order for the United States to assess the 100% penalty under § 6672, two
requirements must be met: (1) the party assessed must be a “responsible person,” i.e., one
required to “collect, truthfully account for and pay over the tax,” and (2) the party
assessed must have “willfully refused to pay the tax.” 13 Id. at 1139. The individual
against whom an assessment is made “bears the burden of proving by a preponderance of
the evidence that one or both [of the elements of responsibility and willfulness] is not
present.” Id. (quoting Hochstein v. United States, 900 F.2d 543, 547 (2d Cir. 1990)).
Shore argues that neither the responsibility nor the willfulness elements of the § 6672 test
are present in this case.
12

§ 6672(a) provides, in part, that:
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.

13

 Although labeled a “penalty,” § 6672 is not generally a punitive provision as it “brings
to the government only the same amount to which it was entitled by way of the tax.”
Turnbull v. United States, 929 F.2d 173, 178, n. 6 (5th Cir. 1991) (internal citation and
quotation omitted).

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1. Responsible Person Prong
It is undisputed that Shore delegated full authority for handling BRE’s finances
and management to Lewis, and that for so long as Lewis remained at the company Shore
did not take an active role in financial matters. Shore maintains that he was therefore not
a “responsible person” during Lewis’ tenure as manager of BRE and thus cannot be liable
under § 6672 for the employment taxes that went unpaid during that period.
For purposes of § 6672, responsibility “is a matter of status, duty, and authority[.]”
Davis, 961 F.2d at 873 (citations omitted). “Authority turns on the scope and nature of
an individual’s power to determine how the corporation conducts its financial affairs; the
duty to ensure that withheld employment taxes are paid overflows from the authority that
enables one to do so.” Purcell v. United States, 1 F.3d 932, 937 (9th Cir. 1993) (citations
omitted). That an “individual’s day-to-day function in a given enterprise is unconnected
to financial decision making or tax matters is irrelevant where the individual has the
authority to pay or to order the payment of delinquent taxes.” Id. (citations omitted).
Similarly, delegation of authority to pay taxes will not relieve a person of responsibility.
Id. at 936-937 (courts have uniformly and repeatedly rejected the theory that delegation
of authority to pay taxes will relieve an individual from responsible person status).
In order to determine whether someone has the authority to pay taxes, and is thus
“responsible” under § 6672, courts have looked to a number of non-exclusive factors
common in the § 6672 case law, such as whether the taxpayer served as an officer of the
corporation or a member of its board of directors, owned a substantial amount of stock in
the company, participated in day-to-day management of the company, determined which
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creditors to pay and when to pay them, had the ability to hire and fire employees, or
possessed check writing authority. See, e.g., Conway v. United States, 647 F.3d 228, 233
(5th Cir. 2011); Johnson v. United States, 734 F.3d 352, 361 (4th Cir. 2013); United
States v. Jones, 33 F.3d 1137, 1140 (9th Cir. 1994). Not every factor must be present,
instead, the Court must consider the totality of the circumstances to determine whether
Shore had the “effective power” to pay the taxes owed by BRE. Erwin v. United States,
591 F.3d 313, 321 (4th Cir. 2010). Significantly, as more than one person may meet
these criteria, “[t]here may be—indeed—there usually are—multiple responsible persons
in any company.” Barnett v. Internal Revenue Service, 988 F.2d 1449, 1455 (5th Cir.
1995). The statute “expressly applies to ‘any’ responsible persons, not just to the person
most responsible for the payment of taxes.” (Id.) (emphasis in original) (citation
omitted). As such, “[t]hat another person in the company has been delegated the jobs of
withholding and generally paying creditors is beside the point.” Id. The “crucial
inquiry” is whether a party, such as Shore, “by virtue of his position in (or vis-à-vis) the
company,” could have had “substantial” input into such financial decisions, had he
wished to exert his authority. Id.
In this case, the undisputed evidence establishes that Shore was a responsible
person under § 6672. First, Shore was BRE’s president. Although a party “cannot be
presumed to be a responsible person merely from titular authority, status as an officer or
director is nevertheless material to this determination.” Johnson, 734 F.3d at 361 (4th
Cir. 2013) (internal citations and quotations omitted). Shore suggests he was “[p]resident
in name only.” (Dkt. 22, p. 9.) Shore also notes BRE did not have corporate by-laws
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delineating his specific corporate authority, and that he did not exercise any of the
traditional duties of a corporate president. (Id.) However, it is undisputed that Shore
signed contracts on BRE’s behalf as its president, including inventory agreements BRE
needed in order to obtain the farm equipment it sold, and that Shore also personally
guaranteed such contracts. Shore also signed on BRE’s behalf and as its president when
BRE opened a line of credit at Ireland Bank, and personally guaranteed the Ireland Bank
line of credit. Further, Shore was BRE’s sole shareholder. He thus “had the effective
power to change” the company’s employees “and thereby direct the business of the
corporation.” Johnson, 734 F.3d at 361. Shore also possessed, but did not utilize, check
writing authority on BRE’s account with Ireland Bank.
Shore did not manage the day-to-day operations of the company or, at least while
Lewis served as manager of BRE, determine which creditors to pay and when to pay
them. However, Shore had monthly telephone calls with Lewis to discuss the business,
made unannounced visits to BRE to assess inventory, and reviewed BRE’s financial
statements. It is unmistakable from Shore’s deposition testimony that he believed, by
virtue of his position in BRE, that he had a right to know the financial condition of the
company.
In his deposition, Shore also significantly testified that when he learned Lewis had
not satisfied payroll liabilities in 2005, he called Lewis and ensured such liabilities were
paid. (Shore Deposition, pp. 63-65, 76, 77-79.) Shore thus had the authority to order the
payment of delinquent taxes. See Denbo v. United States, 988 F.2d 1029, 1033 (10th Cir.
1993) (although “it was Allred…who controlled the day-to-day operations of the
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corporation and made decisions concerning the payment of creditors and disbursement of
funds,” Denbo remained responsible where he had “significant, as opposed to absolute,
control of the corporations finances.”); McDermitt v. United States, 954 F.2d 1245, 1251
(6th Cir.1992) (“[a]lthough not an officer of the corporation,” plaintiff was responsible
because “[h]e had the power and the authority to direct the payment and non-payment of
the corporation’s liabilities.”).
As mentioned, although Shore delegated financial management of BRE to Lewis,
as well as the authority to determine which creditors to pay and when to pay them, the
cases are clear that delegation of such authority does not relieve a party of responsibility
under § 6672. Johnson, 734 F.3d at 362. A taxpayer may be a “responsible person” if he
“had the authority required to exercise significant control over the corporation’s financial
affairs, regardless of whether he exercised such control in fact.” Purcell, 1 F.3d at 937
(concluding that a president and sole shareholder, who was also the authorized signatory
on the corporation’s checking account, was a “responsible person” even though he had
fully delegated all financial duties to another employee). Thus, despite delegating his
authority to Lewis and permitting him to run BRE’s daily affairs, Shore remained a
“responsible person” because he had effective control of the corporation and the effective
power to direct the corporation’s business choices, including the withholding and
payment of trust fund taxes.
Shore was also ultimately responsible for hiring and firing Lewis. When asked, in
his deposition, “Is it fair to say you hired Mr. Lewis,” Shore responded “Oh, yes, I did. I

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hired Mr. Lewis.” (Shore Deposition, p. 45.) Shore also confirmed he fired Lewis more
than once during his deposition:
Q: You hired and eventually fired Mr. Lewis; correct?
A: Yes.
(Id., p. 90).
Q: You eventually decided to fire the Lewises; right?
A: Yes.
(Id., p. 133).
Q: What explanation did you give the Lewises when you fired them?
A: I’m not sure I gave them—I don’t remember what I said to them. It wasn’t real
pleasant, but it was firm, you know.
Q: Did you do it in person?
A: Yes. Yeah.
Q: How come you had the authority to fire the Lewises?
A: Well, I don’t know. Somebody had to do it, I guess. I mean it wasn’t my
company specifically, but I was paying all the bills. I mean I was the one that was
on the hook.
(Id., p. 134.)
Although Lewis was responsible for hiring and firing employees at BRE, Shore, in
his capacity as president, obviously possessed enough authority over corporate affairs to
independently investigate Lewis and ultimately force him and Maureen Lewis out of the
company. Within two months of learning of BRE’s tax deficiencies, Shore took
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complete control of BRE’s financial operations, which also establishes his authority to do
so. Shore also continued to run BRE, and kept certain BRE employees working, for a
short time after he fired the Lewises:
Q: I’d like to talk now about after you fired the Lewises, which I think we’ve
fixed now to about October 1 or 2, 2007.
A: Yes, uh-huh.
Q: Did you keep other employees on after that point?
A: Yes. We were attempting to—repair certain equipment. We had certain
mechanics that were working. We had a baler mechanic that was working. We
did some payroll after that time.
(Id., p. 153-54.)
The undisputed facts thus conclusively establish that Shore possessed the status,
duty, and authority necessary to be a responsible person under § 6672, as evidenced by
his title, stock ownership, check writing authority, because Shore ensured the 2005
payroll taxes were paid upon learning they had not been remitted, by Shore’s ability to
force the Lewises out of the business, and, perhaps most importantly, because Shore
ultimately took complete control over BRE once he learned of the tax liability.
Therefore, the Court finds Shore was a responsible person as a matter of law. See
Barnett, 988 F.2d at 1454 (noting “countless courts have found responsibility [for
purposes of § 6672] as a matter of law” because “certain facts will almost invariably
prove dispositive of a finding of responsibility.”); Erwin, 591 F.3d at 321(affirming
finding plaintiff was responsible person as a matter of law where plaintiff owned oneMEMORANDUM DECISION AND ORDER– Page 13
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third interest in company and served as a corporate officer and director, selected business
sites, hired and fired employees, and, within months of learning of the company’s tax
deficiencies, took complete control of the company’s financial operations); Jefferson v.
United States, 546 F.3d 477, 481 (7th Cir. 2008) (board president was a responsible
person as a matter of law because he secured loans and directed past payment of taxes for
the corporation, reviewed financial reports, and had check-signing authority); Kinnie v.
United States, 994 F.2d 279, 284 (6th Cir. 2993) (corporate vice president and fiftypercent shareholder was a responsible person as a matter of law because he had checksigning authority, hired an accountant to review the books, and eventually took control of
the business).
2. Willfulness Prong
Having found Shore a “responsible person,” the Court must turn to the other
necessary element of § 6672 liability, whether Shore “willfully” failed to collect, account
for, or remit payroll taxes to the United States. § 6672(a). A long line of decisions in the
Ninth Circuit have defined willfulness “as a voluntary, conscious and intentional act to
prefer other creditors over the United States.” Davis, 961 F.2d at 871 (citations omitted).
In order to satisfy the willfulness prong, “[n]o bad motive need be proved, and conduct
motivated by reasonable cause, such as meeting the payroll, may be ‘wilful.’” Buffalow
v. United States, 109 F.3d 570, 573 (9th Cir. 1997) (citing Phillips v. United States IRS,
73 F.3d 939, 942 (9th Cir.1996); Jones v. United States, 60 F.3d 584, 587–88 (9th
Cir.1995); Klotz v. United States, 602 F.2d 920, 923 (9th Cir.1979); Teel v. United States,

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529 F.2d 903, 905 (9th Cir.1976)). Although undoubtedly “harsh,” this standard is the
law. Id. As the Ninth Circuit has explained:
If a responsible person knows that withholding taxes are delinquent, and uses
corporate funds to pay other expenses, even to meet the payroll out of personal
funds he lends the corporation, our precedents require that the failure to pay
withholding taxes be deemed ‘willful.’ This may seem oppressive to the employer
and employees, and amount to ‘unwittingly’ willful, which seems an oxymoron,
but the proposition is established law.
Phillips, 73 F.3d at 942 (citations omitted).
Shore suggests his conduct was not willful because he did not know about BRE’s
tax liability at the time BRE failed to remit payroll taxes in 2006 and 2007. (Dkt. 22, p.
16.) However, a taxpayer may act “willfully” for purposes of § 6672 even though he
does not learn about unpaid taxes until after the corporation has failed to pay them.
Johnson, 734 F.3d at 364. When “a responsible person learns that withholding taxes
have gone unpaid in past quarters for which he was responsible, he has a duty to use all
current and future unencumbered funds available to the corporation to pay those back
taxes.” Erwin, 591 F.3d at 326. If the taxpayer instead knowingly permits payments of
corporate funds to be made to other creditors, a finding of willfulness is appropriate. Id.
(“Even assuming ... that [the taxpayer] did not act willfully prior to learning of the full
extent of the tax deficiencies ..., his conduct after that point unquestionably evidences
willfulness as a matter of law.”) (emphasis in original).
Here it is undisputed that Shore learned of BRE’s unpaid tax liability in August
2007. It is also undisputed that BRE paid more than $120,000 to unsecured creditors

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after Shore learned of BRE’s tax liability.14 Shores’ failure to remedy the payroll tax
deficiencies upon learning of their existence in August 2007, while subsequently
allowing corporate payments to be made elsewhere, including to unsecured creditors,
constitutes “willful” conduct under § 6672. See Phillips, 73 F.3d at 942-43 (where a
responsible person is aware that trust fund taxes are unpaid but permits the business to
continue its operation and pay other creditors, the willfulness prong is satisfied.).
3. The Slodov Exception
Shore also contends his actions fall within a narrow exception to § 6672 liability
carved out by the Supreme Court in Slodov v. United States, 436 U.S. 238 (1978). In
Slodov, the Supreme Court held new management of a corporation is not personally liable
for a § 6672 penalty upon using after-acquired revenue to satisfy creditors other than the
United States, provided the new management assumes control when a delinquency for
trust fund taxes already exists and the withheld taxes have already been dissipated by
prior management. Davis, 961 F.2d at 871-72 (citing Slodov, 436 U.S. at 259-60.) The
Supreme Court in Slodov based this holding in part:
[O]n the rationale that to hold a taxpayer personally liable to the extent of afteracquired funds for taxes owed during a time in which he was not a responsible
person would be to discourage new investors from attempting to salvage a failing
business, which, if the salvage effort were successful, would enable the
government to collect more in delinquent taxes than if the business failed.
14

In its Statement of Material Facts in Support of Summary Judgment, the United States
claimed, “[O]n or after August 14, 2007, BRE paid more than $120,000 out of its
checking accounts to unsecured creditors other than the United States.” (Dkt. 20-1, ¶ 28)
(citing evidence in support). Shore did not address this statement in his summary
judgment papers. A court may consider a fact undisputed for purposes of summary
judgment if a party fails to address another party’s assertion of fact as required by Rule
56(c). Fed. Rule Civ. Proc. 56(e). 
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Kinnie, 994 F.2d at 285 (citing Slodov, 436 U.S. at 252-253).
Shore suggests he falls within the Slodov exception because he did not have
responsibility for management of BRE at the time the tax delinquency was incurred and
because BRE’s debts exceeded its available assets when Shore took over management of
the company. Shore thus contends his conduct was not willful under the Slodov
exception, even though he admittedly used after- acquired money to pay debts, wages and
expenses to keep BRE running rather than paying the back taxes owed to the IRS. (Dkt.
22, pp. 17-18.) The problem with Shore’s theory is that the Court has determined Shore
was a responsible person at the time the 2006 and 2007 tax liability accrued. Unlike in
Slodov, Shore was not a new purchaser of BRE, but was instead a responsible person
when BRE’s tax liability for 2006 and 2007 went unpaid. As such, holding Shore
personally liable for an amount based on after-acquired funds would not discourage new
investors from attempting to save BRE’s failing business. Kinnie, 994 F.2d at 285.
Shore already was an investor in BRE and, as discussed above, had the authority to
handle BRE’s finances, though he delegated this authority to Lewis, at the time the tax
liability was incurred. As such, “a degree of personal fault can be attributed to [Shore] in
that he failed to fulfill his responsibilities during the time that the tax delinquency
accrued.” Id.
In Purcell, 1 F.3d at 938, the Ninth Circuit expressly declined to extend the Slodov
exception to a case where, as here, a company president delegated authority to run a
corporation to a manager but resumed control of the corporation upon learning of the
manager’s embezzlement. In so holding, the Purcell Court emphasized that Slodov does
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not apply in cases where existing, but inactive, management takes control of a business
after learning of unpaid tax liability. Id.
Similarly, in Davis, 961 F.2d at 873-74, a company president argued the Slodov
exception should apply because he was unaware the company’s taxes had not been paid
until after they were due, and that once he learned that the company was not paying
employees’ withholding taxes, he assumed a more active role in supervising corporate
disbursements. Id. at 873. The Ninth Circuit held transfers in responsibility internal to
the corporation cannot be equated with the accession of new management that occurred
in Slodov. 15 Id. at 873-74. Where, as here, an individual is a responsible person both
before and after tax liability accrues, there is a duty to use unencumbered funds acquired
after the withholding obligation becomes payable to satisfy that obligation.16 “[F]ailure

15

The Davis Court further explained Davis’ interpretation of Slodov would “encourage
corporate roulette,” as:
Responsible officers, upon learning that taxes had gone unpaid during their watch,
could simply rotate their respective responsibilities and duties. Once the officers
assumed their new duties, they would be relieved from section 6672 personal
liability for the use of forthcoming revenues to pay debts other than the back taxes.
The corporation could thus delay compensating the federal treasury for the use of
its money indefinitely, thereby freeing up corporate income for more selfinterested expenses.
Id. at 874.

16

Although a taxpayer does not act willfully by paying funds to a secured creditor over
the government because such funds are encumbered and thus unavailable to satisfy tax
liability, Nakano v. United States, 742 F.3d 1208, 1211-12 (9th Cir. 2014), Shore does
not dispute that BRE paid more than $120,000 to unsecured creditors shortly after he
learned about BRE’s tax liability. The Nakano exception accordingly does not apply,
regardless of BRE’s responsibility to secured creditors. See also Honey v. United States,
963 F.2d 1083, 1090 (8th Cir. 1992) (person against whom § 6672 liability is assessed
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to do so when there is knowledge of the liability constitutes willfulness.” Id. at 876
(quoting Mazo v. United States, 591 F.2d 1151, 1157 (5th Cir. 1979)). Once he became
aware of BRE’s tax liability in August 2007, Shore had a duty to ensure that the taxes
were paid before any payments were made to other creditors. Mazo, 591 F.2d at 1157
(5th Cir. 1979). The undisputed evidence that he failed to do so establishes willfulness as
a matter of law. Id.; see also Barnett, 988 F.2d at 1457 (willfulness is normally proved
with evidence that the responsible person paid other creditors with knowledge that
withholding taxes were due at the time to the United States).
The Court sympathizes with Shore’s predicament and regrets the unfortunate
circumstances preceding this case. However, allowing a responsible party to divert afteracquired funds to pay liabilities other than that owed for unpaid payroll taxes would in
effect require the federal government to subsidize the corporation’s recovery by
foregoing collectible tax dollars. Davis, 961 F.2d at 878. As numerous courts have
counseled, “[T]he government cannot be made an unwilling partner in a business
experiencing financial difficulties.” Id. (quoting Thibodeau v. United States, 828 F.2d
1499, 1506 (11th Cir. 1987); see also Mazo, 591 F.2d at1154 (“[T]he United States may
not be made an unwilling joint venture in the corporate enterprise.”).

has burden of proving that all potentially available funds were encumbered.); Conway v.
United States, 647 F.3d 228, 237 (5th Cir. 2011) (Taxpayer failed to meet his burden of
raising fact issue on encumbrance where he submitted no evidence that funds paid to
other creditors had a legal priority over the unpaid excise taxes); Barnett, 988 F.2d at
1458 (“We next observe that the burden to prove that the loan proceeds and accounts
receivable deposited into the Company’s bank accounts…were ‘encumbered’ falls on the
[the taxpayer.]”).
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ORDER
Having carefully considered the filings of all the parties and entire record in this
case, and for the reasons stated herein;
IT IS HEREBY ORDERED that Defendant United States’ Motion for Summary
Judgment (Dkt. 20) is GRANTED.

DATED: December 4, 2014

_________________________
Edward J. Lodge
United States District Judge

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