Wheeler v. United States of America

Filing 45

MEMORANDUM OPINION & ORDER, granting 33 MOTION for Partial Summary Judgment by United States of America; this is an INTERLOCUTORY AND NON-APPEALABLE ORDER. Signed by Judge Henry R. Wilhoit, Jr on 7/13/15.(SMT)cc: COR

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF KENTUCKY
NORTHERN DIVISION
ASHLAND
Civil Action No. 12-86-HRW
TIMOTHY WHEELER,

v.

PLAINTIFF,

MEMORANDUM OPINION AND ORDER

UNITED STATES OF AMERICA,

DEFENDANT.

This matter is before the Court upon Defendant United States' Motion for Partial
Summary Judgment [Docket No. 33]. The matter has been fully briefed by the parties [Docket
Nos. 33-1,41 and 44]. For the reasons set forth herein, the Court finds that the Defendant is
entitled to judgment to judgment as a matter of law with regard to the tax periods ending June 30,
2008, September 30, 2008, and December 31, 2008.

I.
In late 2006, Plaintiff Timothy Wheeler, along with several other individuals
purchased a failing ambulance company, Portsmouth Ambulance Incorporated. [Complaint,
Docket No. 1, ,1~ 10 and 14]. Plaintiff initially invested $480,000 and owned approximately
20% of its available shares. !d. at

~17.

Plaintiff served as the company's Secretmy until August

2007, when he became its President. Id at ~28. Pursuant to Section 5.03 of the Portsmouth
Ambulance Regulations, as President, Plaintiff possessed significant authority of the business:
The president shall be the chief executive officer of the
Corporation and shall have active executive management of the
operations of the Corporation, subject, however, to the control of
the Board of Directors and shall have full authority to execute

powers of attorney appointing other corporations,
partnerships or individuals as agents of the Corporation, execute contracts
on behalf of the Corporation, and shall cause the Corporate Seal of the
Corporation to be affixed to any instrument requiring it. The President
shall preside at all meetings of shareholders and discharge all the duties
that devolve upon a presiding officer, and perform such other duties as
may be prescribed from time to time by the Board of Directors or the
Regulations.
[Docket No. 33-11, PAI Regulations].

By the spring of2008, during Plaintiffs tenure as President, the company was in financial
distress. He sought to alleviate the company's cash flow problem by personally loaning it
approximately $100,000. [Deposition of Timothy Wheeler, Docket No. 33-35, pg. 35]. Plaintiff
persuaded the company's Secretary, Sriharsha Velm')', to loan an additional $100,000.
[Deposition of Sriharsha Velury, Docket No. 33-38, pg. 48-49].
On October 27, 2008, the Government filed a federal tax lien against Portsmouth
Ambulance for the payroll tax periods ending March 31, 2008, and June 30, 2008, in the amount
of$356,806.00. [Docket No. 1, ~ 22].
The record is somewhat unclear as to when Plaintiff became aware that Portsmouth
Ambulance had not paid accrued payroll taxes. Viewing the facts as most favorable to the nonmoving party, in this instance, Plaintiff, it is certain that he knew of this failure by the end of
2008. [Docket No. 33-35, pg. 29]. At his deposition, Plaintiff testified that, in his view, he had
only two options: (1) "shut the company down, take the revenue and pay the payroll taxes" or (2)
"sell the company." !d. He chose the latter. He stated:
At the point when I was told they had to pay payroll taxes, and
Medicare is basically not paying the company anymore, you know,
back then, the decisions were: We have no revenue. How do I

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preserve 125 jobs and shareholder value? It had nothing to do with
payroll taxes.

Id. at p. 30.
Having opted to sell the company, he took no meaningful action to ensure tax
compliance. Plaintiff admitted that he declined to use his authority as president to write checks
to cover the past due taxes . ld. at 120. Nor did he follow up with the company's accountant to
make sure employment taxes were being paid. !d.
On January 6, 2009, the Government filed a second federal tax lien against Portsmouth
Ambulance, this time for the payroll tax periods ending December 31, 2000, and September 30,
2002, and corporate return form 1120 for tax year 2005, in the amount of $222,079.68, all as an
"alter ego" of Urgent Care. [Docket No.

I,~

23]. On February 9, 2009, the Govemment

filed a third federal tax lien against Portsmouth Ambulance for taxes in the amount of
$36,382.51 for the tax period ending December 31, 2005. Id.

at~

24.

Despite its fiscal problems, Portsmouth Ambulance continued to operate untilmid-2009.
[Docket No. I at ,130]. In the first three months of2009, it paid over $300,000 to its creditors,
including $7,000 to Plaintiff, as a partial repayment for his loan. [Docket No. 33-33, pg. 78 and
122]. However, the taxes owing remained unpaid.
Although Plaintiff testified that he was "consumed" with finding a buyer for the
company, however, a sale was never finalized. [Docket No. 33-35, pg. 29].
In Apri12009, minority shareholders filed a derivative suit naming Plaintiff as defendant,
and alleging that he had breached his fiduciary duties to the shareholders of Portsmouth
Ambulance. [Docket No.I,

~

26]. Plaintiff formally resigned as Portsmouth Ambulance's

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president on June I 0, 2009. ld

at~

28.

As a result of outstanding bank loans that could not be paid, on June 18,2009, the bank
seized Portsmouth Ambulance's remaining assets and sold it for $1 million. !d. at ,1~ 28-31.
Ultimately, $636,587.40 went to the IRS. Jd.

at~

32. This was distributed by the IRS as follows:

Portsmouth Ambulance's liability for miscellaneous penalty in the amount of$38,420.97;
Portsmouth Ambulance's payroll tax liability for March 31,2008, in the amount of$114,775.19,
which constituted a "non-trust fund" payment; Portsmouth Ambulance's payroll tax liability for
June 30,2008, in the amount of$59,805.00 which constituted a "non-trust fund" payment;
Portsmouth Ambulance's payroll tax liability for September 30, 2008, in the amount of
$49,575.00, which constituted a "non-trust fund" payment; Portsmouth Ambulance's payroll tax
liability for December 31,2008, in the amount of$40,242.00, which constituted a "non-trust
fund" payment; Urgent Care's payroll tax liability for December 31, 2000, in the amount of
$110,132.04; Urgent Care's payroll tax liability for September 30,2002, in the amount of
$140,144.39; and finally, $83,492.81 for Urgent Care's liability shown on form 1120 for tax year
ending 2005.ld In addition to these funds taken from the bank's sale of Portsmouth
Ambulance, the IRS issued an assessment against Plaintiff personally in the amount of

$45l,133.96.ld. at ,133. This was the alleged "Trust Fund P01iion" of Portsmouth Ambulance's
tax liability that remained after the bank's sale of Portsmouth Ambulance, and it related to all
four quarters of2008. !d.

~

33. The IRS issued an additional assessment against Plaintiff in the

amount of $32,505.54 as a trust-fund recovery penalty for the Portsmouth Ambulance
employment taxes for the quarterly period ending June 30, 2009. ld.
assessments made against Plaintiff were $483,639.50.

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at~

54. Thus, the total

Plaintiff filed this civil action seeking an abatement of taxes wrongfully assessed against
him in the amount of$483,639.50. Defendant, United States of America filed a counterclaim,
alleging that he is liable for the taxes of Portsmouth Ambulance, Inc. for employment taxes
accruing from the four quarterly periods ending June 30, 2008; September 30, 2008; December
31, 2008; and June 30,2009.
Defendant now seeks judgment as a matter of law as to its counterclaim and Plaintiff's
liability pursuant to 26 U.S. C. § 6672.
II.

Summary judgment is appropriate if the pleadings, depositions, answers to
interrogatories, and affidavits show there is no genuine issue as to any material faet and the
moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56. The burden to show
that there are no genuine issues of material fact falls on the parties seeking summmy judgment.

Celotex Corp. v. Catrett, 477 U.S. 317,322-23,106 S.Ct. 2548,91 L.Ed.2d 265 (1986).
"Credibility determinations, the weighing of the evidence, and the drawing of legitimate
inferences from the facts are jury functions, not those of a judge[.]" Anderson v. Liberty Lobby,

Inc., 477 U.S. 242,255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). This Court will consider the
evidence in the light most favorable to the non-moving parties, drawing all justifiable inferences
in their favor. !d. The ultimate question is whether the evidence presents a sufficient factual
disagreement to require submission of the case to the jury, or whether the evidence is so onesided that the moving parties should prevail a matter oflaw. !d. at 251-52, 106 S.Ct. 2505.

III.
The Internal Revenue Code requires employers to withhold taxes from their

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employees' wages, and to hold such taxes in trust for the United States. 26 U.S. C.§§ 3102,
3402, 7501. These taxes consist of (1) the income taxes that the employer is required to deduct
and withhold from each of its employee's wages. 26 U.S.C. § 3402(a); (2) the amounts withheld
for Social Security and Medicare taxes. 26 U.S.C. §§ 3101,3102.
Liability attaches under § 6672 only if two requirements are
met: (1) the individual must be a "responsible person" under the statute, and (2) he must have
"willfully" failed to pay over the amount due Bell v. United States, 355 F.3d 387, 392-93 (6th
Cir. 2004). A person need possess only be significant (rather than absolute) control over a
company's financial management in order to be considered responsible under§ 6672. Id
Accordingly, "[s]ection 6672 does not confine liability for the unpaid taxes only to the single
officer with the greatest or the closest control or authority over corporate affairs." Gephart v.

United States, 818 F.2d 469, 476 (6th Cir. 1987). Even a corporate officer who was initially
unaware ofthe unpaid taxes can be held liable if she or he fails to direct all available current and
future unencumbered funds to pay those back taxes. Huizinga v. United States, 68 F.3d 139, 145
(6th Cir. 1995). In this way, "[t]he statute's punitive nature comes not from an increased
monetary penalty ... but rather from personal, as opposed to corporate, liability." Bell, 355 F.3d
at 392-93.
A.

The Plaintiff was a "responsible person" during at least the last three
quarters of 2008 and the first quarter of 2009.

Whether one is considered a person "responsible" within the purview of§ 6672 focuses
upon the degree of influence and control one has over the financial affairs of the company.

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Kinnie v. United States, 994 F.2d 279,283 (6'h. Cir. 1993). Among the factors frequently
considered are: (I) the duties of the officer as outlined by the company's by-laws; (2) the ability
of the individual to sign checks of the company; (3) the identity of the officers, directors, and
shareholders of the company; (4) the identity ofthe individuals who hired and fired employees;
and (5) the identity of the individuals who were in control of the day-to-day financial affairs of
the company. !d.
Plaintiff admits that he was among the two largest shareholders, possessed and exercised
his authority as president, and received thousands of dollars for his services. As President, he
had broad authority under Portsmouth Ambulance's corporate regulations to: (I) appoint
corporate agents; (2) enter contracts on behalf of the company; and (3) call and preside over
meetings of the shareholders or directors.
Pursuant to this authority, he helped negotiate contracts to sell Portsmouth
Ambulance to MTS and King's Daughters Medical Center. was deeply involved keeping the
company afloat, eventually loaning Portsmouth Ambulance large amounts of his personal funds
(and convincing a fellow corporate officer to do the same).
Notably, he was one of only three individuals with signature authority over the company's
bank account. The following colloquy occurred during his deposition:

Q. So I'm just going to quickly summarize. So you had an
authority to sign
checks on behalf of Portsmouth Ambulance, correct?
Dr. Wheeler: I had the authority, yes.
Q. And you signed-- and you had the authority to endorse checks
on behalf of Portsmouth Ambulance, correct?
Dr. Wheeler: I had the authority, yes, but never did.

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Q. And you had authority to take out loans on behalf [ofj
Portsmouth Ambulance, correct?
Dr. Wheeler: I functioned as president of the company on big
matters, including the financial issues with the banks.
Q: Is it your testimony, then, that you were not authorized to sign
any of those loan documents?
Dr. Wheeler: No, I am authorized -- I was authorized, yes, sir. ...
I had authority and exercised that authority.
[Docket No. 33-35, pg. 94-95].
Despite his own testimony to the contrmy, Plaintiff insists that his only role in
Portsmouth Ambulance was that of a passive investor. As for being the President, he urges that
he was so "only on paper." !d. at 33. He states that he was not involved in the day-to-day
operations of the business. !d. at pg. 35. He emphasizes that he had no involvement whatsoever
with the company's payroll. !d.
Plaintiffs protests reflect a misunderstanding of the inquiry under § 6672 . It is his
status, duty and authority that are dispositive; the fact that he did not always actually exercise or
exert his authority does not absolve him of his responsibility to ensure that withholding taxes
were properly paid. Kinnie, 994 F.2d at 284.
The facts presented to the Court in Kinnie bear remarkable similarity to those before this
Court. Plaintiff William Kinnie formed a corporation with his partner whereby each partner was
a 50% owner. !d. The purpose of the business was to lease and service new and used trucks.
Kinnie served as Vice President and his partner as President. The corporation began failing to
pay the appropriate payroll withholding taxes in 1985, but continued to pay other creditors.
Kinnie testified he learned of the delinquency in late 1986, but trusted his partner to take care of
the debt. Subsequently, Kinnie directed an accountant to review the corporation's financial

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records and, in early 1987, Kinnie forced his partner to relinquish any management control of the
corporation. !d. at 285. Kinnie then established a new corporation identical to the first,
essentially subsuming the partners' original corporation. Kinnie took out personal loans to satisfy
the debts of the new company, yet still failed to pay the payroll taxes. Kinnie filed an action in
the District Court for the Eastem District of Michigan, seeking a refund and tax abatement for
the total amount due. !d. The District Court granted summaty judgment in favor of the United
States and found Kinnie liable under §6672. On appeal, Kinnie argued he could not be a
"responsible person" because all financial duties were delegated to his pminer, and he was
merely a passive investor during the time period the payroll taxes accrued. In affirming the
District Court's ruling, the Sixth Circuit noted that Kinnie was Vice President and a 50%
shareholder, had the authority to sign company checks, had an accountant review the corporate
books, and forced his partner to give up management control. The Comi noted, "there may be
more than one person deemed a 'responsible person' within a corporation. Moreover, one who
possesses significant control over the company's financial affairs may not escape liability by
delegating the task of paying over the taxes to someone else." Id. The Court further held that
although Ki1mie "did not always exercise his powers during the qumiers at issue," he could not
avoid of "responsible person" status. !d.

It is clear Kinnie most accurately resolves the issue before this Court. Like Kinnie,
Plaintiff owned a large share of the company. Like Kinnie, Plaintiff had a leadership role in the
company - that of President during the time period at issue.. Like Kinnie, Plaintiff had the
authority to sign company checks and had access to company financial records. Finally, like
Kinnie, Plaintiff was actively involved in attempts to revive the company. It is no moment that
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Plaintiff, like Kinnie, failed to exercise his clear right to sign company checks, access company
financial records, and participate in company financial management. Like Kinnie, his failure to
consistently exercise his authority does not relieve him of "responsible person" status.
The record establishes that Plaintiff satisfies the first requirement for liability under §
6672.

B.

Plaintiff acted "willfully" in failing to cure Portsmouth Ambulance's tax
delinquencies after December 2008.

The second requirement under § 6672 is that one willfully fails to collect, truthfully
account for, or pay over the employment taxes. One acts willfully within the meaning of the
statute by making "a deliberate choice to voluntarily, consciously, and intentionally pay other
creditors rather than make tax payments ."Collins v. United States, 848 F.2d 740, 742 (6th Cir.
1988). Once informed, a responsible person's obligation to address a prior tax delinquency is
nearly absolute--even where the consequences for the company or individual are dire. See e.g.
Bell, 355 F.3d at 396 (responsible person liable for paying over taxes even where doing so would
subject the person to civil suit).
Plaintiff first learned of Portsmouth Ambulance's tax delinquency in December of2008
but admits, however, that after this date he deliberately avoided paying off the company's past
and current tax liabilities. He testified that his primary concern was not meeting his company's
employment tax obligations, but "preserving shareholder value." [Docket No. 33-35. Pg. 30].
During his deposition, he comes very close to admitting that he could have taken action to
address the company's tax deficiencies, but chose not to:
Q. But earlier you testified that you had authority to be able to
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[sign corporate checks]?
A. Yes. I had authority, yes.
Q. And you didn't use that authority to pay the taxes, correct?
A. Correct. I -- we decided at that point that the company needed to
keep going to pay payroll and-so [a] sale can happen. If you shut
it down, then that is the least-that was the least favorable
option. The favorable option was to keep the company going
until we sold the company. So was there a month that payroll
taxes didn't get paid that I could have paid? Maybe. But
beyond that, I had no control to do anything.
Q.... Once you realized that the taxes weren't being paid, did you
take any steps to monitor what payments were being made in order
to ensure the taxes were being paid?
A. No. Again, I made the statement to Mike Robinson: If they
don't pay the payroll taxes, my vote is to shut it down.
Q. Did you follow up with Mike Robinson to make sure the taxes
were being paid?
A. No, I did not.
Q. Did you follow up with Kenny Boggs to make sure that the
taxes were being paid?
A. No, I did not. Not that I remember.
!d. at 120-122.
Indeed, rather than fulfill the tax obligations, the company paid over $300,000 to
creditors in early 2009. Given this record, Plaintiff cannot establish a genuine dispute as to the
fact that he voluntarily, consciously, and intentionally preferred other creditors (including
himself) over the United States. Nor can he escape liability by contending that P011smouth
Ambulance would have gone out of business, or that he might have been sued, if he had
stopped paying the company's creditors in order to satisfy the company's tax delinquencies.
See Bell, 355 F.3d at 396-97.

IV.
The statutory scheme of §6672, and the caselaw interpreting it, focus on objective
11

factors, rather than subjective factors. In this case, objectively, Plaintiff had the requisite
responsibility and the requisite knowledge of the tax delinquency and yet failed to rectifY it.
Having reviewed the parties' briefs and the attachments thereto, the court concludes
that there is no genuine dispute as to the fact that the Plaintiff, Timothy M. Wheeler, was
responsible for the collection, truthful accounting of, and payment of the employment taxes
ofP01tsmouth Ambulance during the period between August 28, 2007 and June 12, 2009.
There is also no genuine dispute that the Plaintiff willfully refused to pay over Portsmouth
Ambulance's available unencumbered funds after he was notified that Portsmouth
Ambulance had not fully paid its employment taxes for the qumterly periods ending June 30,
2008, September 30,2008, and December 31,2008. Accordingly, the Plaintiff was properly
assessed penalties pursuant to 26 U.S.C. § 6672, and the government is entitled to the unpaid
balance of those penalties as a matter oflaw.
Accordingly, IT IS HEREBY ORDERED that Defendant United States' Motion for
Partial Summary Judgment [Docket No. 33] be SUSTAINED.
This is an INTERLOCUTORY and NON- APPEALABLE ORDER
This

B~ay of July, 2015.
Signed By:
Henrv R. Wilhoit. Jr.

United Statea Dletrfct .Judea
_..J

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