Arndt v. United States of America

Filing 28

ORDER signed by Judge Lynn Adelman on 7/22/2013 Denying 13 Motion for Summary Judgment; Denying 17 Motion for Summary Judgment; and setting a Telephonic Status Conference for 8/5/2013 at 01:30 PM before Judge Lynn Adelman. The court will initiate the call. (cc: all counsel) (nts)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF WISCONSIN
MELANIE ARNDT,
Plaintiff,
v.

Case No. 11-CV-00546

UNITED STATES OF AMERICA,
Defendant.

DECISION AND ORDER
The Internal Revenue Service (“IRS”) assessed penalties against Melanie Arndt on
the ground that, pursuant to 26 U.S.C. § 6672, she was a person responsible for the
nonpayment of federal employment taxes by a Wisconsin painting contractor, Pro Touch
Professional Finishes, Inc. (“Pro Touch”), for tax periods in 2006 and 2007. Arndt paid a
portion of the penalties and then brought this action seeking a refund. The IRS
counterclaimed seeking the balance of the penalties. Both parties now move for summary
judgment.
Summary judgment is appropriate where “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). When considering cross-motions for summary judgment, I construe the evidence in
the light most favorable to the party against whom the motion under consideration is made.
Samuelson v. LaPorte Cmty. Sch. Corp., 526 F.3d 1046, 1051 (7th Cir. 2008). I may grant
summary judgment only if no reasonable juror could find for the non-moving party.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). The question presented is
whether Arndt is personally liable for Pro Touch’s unpaid employment taxes. This depends

on 1) whether she was a “responsible person,” meaning that she was responsible for
collecting, accounting for, or paying the taxes, and 2) whether she “willfully” failed to collect
or pay the taxes over to the IRS. Jefferson v. U.S., 546 F.3d 477, 480 (7th Cir. 2008). Arndt
bears the burden of proof on both of these issues. U.S. v. Running, 7 F.3d 1293, 1297 (7th
Cir. 1993).
A responsible person is one who has “the power to control the decision-making
process by which the employer corporation allocates funds to other creditors in preference
to its withholding tax obligations.” Bowlen v. U.S., 956 F.2d 723, 728 (7th Cir. 1992). She
need not have exclusive control over the disbursal of funds or the final say as there can
be more than one responsible person within a company. Id. She need only have significant
control, meaning the ability to “‘imped[e] the flow of business to the extent necessary to
prevent the corporation from squandering the taxes it withheld from its employees.’” U.S.
v. Kim, 111 F.3d 1351, 1362 (7th Cir. 1997) (quoting Thomas v. U.S., 41 F.3d 1109, 1113
(7th Cir. 1994)). Indicia of responsibility include: “holding corporate office, owning stock in
the company, serving on the board of directors, possessing the authority to sign checks,
and control over corporate financial affairs.” Id. at 1362–63. “A responsible person willfully
fails to remit withheld taxes to the government if [she] pays other creditors after [she]
knows of the employer’s failure to pay the withheld funds to the government,” or “recklessly
disregards” a known risk that the taxes will not be paid to the government. Thomas, 41
F.3d at 1114. “Reckless disregard” is established if a person: “(1) clearly ought to have
known that (2) there was a grave risk that withholding taxes were not being paid and if (3)

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[she] was in a position to find out for certain very easily.” Wright v. U.S., 809 F.2d 425, 427
(7th Cir. 1987).
Arndt’s brother-in-law, Jason Acevedo, owned Pro Touch, and in 2004 Arndt
became the company’s office manager. She answered phones, opened mail, typed and
proofread estimates for jobs, and organized the company’s files. She also helped Acevedo
process payroll. Each pay period, all of the company’s painters and other staff members
submitted time sheets to Acevedo. Once he had reviewed and approved them, plaintiff
entered the hours worked into QuickBooks, an accounting software program. She then
used the program to generate payroll checks that either she or Acevedo signed. Plaintiff
could sign these checks because Acevedo gave her full check signing authority on both
of Pro Touch’s bank accounts. Plaintiff also used QuickBooks to generate reports showing
the company’s outstanding bills. She gave these reports to Acevedo who told her which
bills to pay. Plaintiff used QuickBooks to generate the checks for those bills and either she
or Acevedo signed them.
In addition to these duties, plaintiff helped Acevedo prepare and file Pro Touch’s
federal employment tax returns. Employment taxes are taxes that the Internal Revenue
Code requires an employer to withhold from its employees’ paychecks for income and
social security taxes. See Slodov v. U.S., 436 U.S. 238, 242–45 (1978). Each quarter, an
employer has to pay the withheld taxes over to the Internal Revenue Service (“IRS”) and
file a tax return reporting the total amount withheld and the amount paid to the IRS. Plaintiff
used QuickBooks to complete Pro Touch’s employment tax returns. She gave the returns
to Acevedo to review, and, once he had approved them, she signed and filed them. At her

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deposition, plaintiff said that she signed tax returns and checks merely as a convenience
to Acevedo because he was frequently out of the office at job sites and that she did not
help him make financial decisions. Acevedo agreed that this was the case and testified that
he maintained full control over the day-to-day operations of the company.
Around 2005, Pro Touch began to have cash flow problems because several of its
customers declared bankruptcy and were unable to pay their bills. Plaintiff’s father, Terry
Schmitz, loaned the company $300,000, and her stepfather, Bill Bahrke, loaned the
company $60,000, but Pro Touch still had trouble paying its creditors. It became impossible
for plaintiff to balance the company’s checkbook, and, in July 2006, she noticed that the
employment tax return for the previous quarter showed that Pro Touch had failed to pay
its taxes. The tax returns that she submitted for the third and fourth quarters of 2006 and
the first quarter of 2007 showed similar deficiencies. Plaintiff asked Acevedo about these
tax debts and he reassured her that he was taking care of the taxes. In August 2007, the
company shut down. After the shut down, the IRS assessed a tax penalty against both
Acevedo and plaintiff for the 2006 and 2007 unpaid taxes.
The evidence strongly suggests that Arndt was a responsible person. She had full
check-signing authority, paid many of Pro Touch’s bills, and filled out and signed the
company’s employment tax returns. These duties are usually performed by someone with
the authority to decide which creditors will be paid. However, this is not always the case.
See Jefferson, 546 F.3d at 480–481 (finding taxpayer responsible because his involvement
in the company’s financial affairs was “significant” and “included more than simply writing
checks”); see also Godfrey v. U.S., 748 F.2d 1568, 1575 (Fed. Cir. 1984) (“The mechanical

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duties of signing checks and preparing tax returns are . . . not determinative of liability
under § 6672.”). Here, plaintiff maintains that her duties were purely ministerial and relies
on her own testimony and that of Acevedo that she only wrote checks or signed legal forms
at his direction and that he retained full control over Pro Touch’s day-to-day operations. It
is not proper for me to make credibility determinations on a summary judgment motion, and
I cannot definitely say that a reasonable jury would reject this testimony. Thus, a jury must
decide whether plaintiff was a responsible person.
The IRS also presents considerable evidence that Arndt acted willfully. She knew
Pro Touch was having financial problems, and, as early as July 2006, she knew it was
behind on its employment taxes because the employment tax return she prepared that
month showed a deficiency. Despite this knowledge, she continued signing checks for
creditors other than the United States. Plaintiff, however, claims that she did not know the
taxes were not being paid because Acevedo told her he was taking care of them and
Acevedo supports this assertion. Therefore, I will also allow the jury to decide this question.
THEREFORE, IT IS ORDERED that both parties’ motions for summary judgment
(Docket #13, 17) are DENIED.
IT IS FURTHER ORDERED that a telephone status conference for the purpose of
setting a trial date is scheduled for August 5, 2013 at 1:30 p.m. The court will initiate the
call.
Dated at Milwaukee, Wisconsin, this 22nd day of July 2013.

s/ Lynn Adelman
LYNN ADELMAN
District Judge
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