                                                                                                                           Opinions of the United
1994 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit


7-15-1994

United States of America v. Carrigan, et al.
Precedential or Non-Precedential:

Docket 93-5687




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                 UNITED STATES COURT OF APPEALS
                     FOR THE THIRD CIRCUIT

               ___________________________________

                           No. 93-5687
               ___________________________________


                    UNITED STATES OF AMERICA

                               v.

              ROBERT P. CARRIGAN, DAVID L. FENDRICK
                      AND EDWARD M. SULLIVAN


                  EDWARD M. SULLIVAN, Appellant


               ___________________________________

         On Appeal From the United States District Court
                 For the District of New Jersey
                   (D.C. Civil No. 92-cv-4443
               ___________________________________


                       Argued May 5, 1994

                 Before: SLOVITER, Chief Judge,
                 HUTCHINSON, Circuit Judge, and
                    DIAMOND, District Judge*

                     (Filed July 18, 1994)

               ___________________________________




*Hon. Gustave Diamond, United States District Judge for the
Western District of Pennsylvania, sitting by designation.



                               1
          Gary R. Allen, Esquire
          Jonathan S. Cohen, Esquire
          Marion E.M. Erickson, Esquire (Argued)
          United States Department of Justice
          Tax Division
          P.O. Box 502
          Washington, D.C. 20044
          (Attorneys for Appellee)

          Robert H. Louis, Esquire
          Howard M. Soloman, Esquire (Argued)
          Abrahams, Loewenstein, Bushman & Kauffman
          1650 Market Street
          3100 One Liberty Place
          Philadelphia, PA 19103
          (Attorneys for Appellant)



                          ______________

                      OPINION OF THE COURT

                          _______________


DIAMOND, District Judge


          Edward M. Sullivan ("Sullivan") appeals an order of the

United States District Court for the District of New Jersey

granting summary judgment in favor of the United States and

denying his motion for summary judgment.    Specifically, the

district court upheld the Internal Revenue Service's ("IRS")

assessment of a 100% penalty against Sullivan pursuant to §6672

of the Internal Revenue Code on grounds that he was a responsible

person who willfully failed to pay over federal employment taxes.

Because we believe that the record before us does not establish

Sullivan's liability as a matter of law, we will reverse and

remand for a trial on the merits.




                                2
                            I. Background Facts0

             In September 1984, Sullivan began working as president

of Pat's International, Ltd. ("Pat's"), a company which operated

fast food restaurants specializing in Philadelphia-style

cheesesteaks.      Sullivan was hired by Robert P. Carrigan

("Carrigan"), chairman of the board of directors and chief

executive officer of Pat's.       Pursuant to his designation as

president, Sullivan was responsible for (1) assisting Carrigan in

raising capital for Pat's by meeting with potential investors;

(2) managing restaurant operations; and (3) locating new

restaurant sites.      Sullivan also was authorized to sign checks

drawn from the company's payroll and general operating accounts.

             In February or March 1985, Sullivan first became aware

that Pat's was not current in its payment of quarterly employment

taxes   to   the   United   States.0       During   this   same   time period,

Sullivan loaned Pat's $20,000.00, at the request of Carrigan, so

that it could pay its creditors, including the IRS.                   Sullivan

took no steps, however, to ensure that the $20,000.00 was applied

to the tax liability, even though he knew that other creditors

were being paid ahead of the United States.            Sullivan was removed
   0
     These facts are drawn exclusively from the parties' joint
  pretrial admissions and stipulations submitted to the district
                              court.
0
 The record also demonstrates that during his tenure as president
of Pat's, Sullivan was aware that an employer has a duty to
withhold and pay over to the United States the federal employment
taxes of its employees.      Sullivan also was aware that those
individuals responsible for the collection and payment of
employment taxes, who failed to do so, could be held personally
liable for the amount of the employment taxes not paid to the
United States.



                                       3
as president of Pat's in August 1985, and left the company the

following month.

               In    April    1989,    the    IRS   made     an   assessment    against

Sullivan in the amount of $83,060.78 pursuant to 26 U.S.C.A.

§6672.0        The    IRS    charged    that      Sullivan    willfully   failed    to

account for and pay over to the United States federal employment

taxes withheld from the wages of Pat's employees during the three

quarters ending March 31, 1985, June 30, 1985, and September 30,

1985.0

               In October 1992, the United States filed a complaint in

the district court seeking to reduce to judgment the assessments

that     had   been    made    against       Sullivan,     Carrigan,   and     Fendrick




0
This section provides in pertinent part:

               §6672. Failure to Collect and Pay Over Tax,
               Attempt to Evade or Defeat Tax.

                 (a) General Rule.   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.

26 U.S.C.A. §6672.
0
 At the same time, the IRS made assessments in the amount of
$204,820.33 against Carrigan and $102,661.00 against David
Fendrick ("Fendrick"), chief financial officer of Pat's, for the
four quarters ending March 30, 1985, through December 31, 1985.


                                              4
pursuant to §6672.0        Thereafter, Sullivan filed an answer seeking

dismissal of the complaint against him for failure to state a

claim   upon    which   relief    could       be    granted,    and    also    filed    a

counterclaim seeking a refund of $100.00 paid on account of the

penalty   assessed      against   him.0        Upon     consideration        of   cross-

motions   for    summary      judgment,       the   district    court       found   that

"[a]lthough Sullivan may not have always had the 'final' say

about paying creditors, in the apocalyptic sense of the word," he

was a responsible person under §6672 because (1) he had signature

authority on the payroll and general operating accounts, which he

exercised at least once in making a tax payment to the IRS; (2)

he was president of Pat's; (3) he devoted significant time to

raising capital for the company; and (4) he loaned the company

$20,000.00 to pay creditors.           Further, the district court found

that Sullivan willfully failed to pay over the withholding taxes

because he was aware of the unpaid tax liability and that other

creditors      were   being    paid   ahead        of   the   IRS,    yet   failed     to

exercise his authority to ensure that the taxes were paid, either

with the $20,000.00 that he personally loaned to Pat's or from

the existing balances in the company's accounts on which he had

signature authority.0
0
 Carrigan and Fendrick failed to plead or otherwise defend, and
defaults were entered against them in this action on May 14,
1993. They are not parties to this appeal.
0
 In February 1992, Sullivan paid $100.00 of the assessment made
against him, and simultaneously filed a claim for refund and a
request for abatement of the entire assessment. The refund claim
was denied by the IRS on May 8, 1992.
0
 During the period that Sullivan was president and knew that the
employment taxes were not being paid, there was a positive
balance in the payroll account of no more than $9,856.61 and a

                                          5
           The district court had jurisdiction over the parties'

claims by virtue of 28 U.S.C.A. §§1340, 1345, and 1355 and 26

U.S.C.A. §§7401 and 7402.         We have jurisdiction over the appeal

pursuant to 28 U.S.C.A. §1291.

           In   reviewing   the    district   court's    grant   of   summary

judgment we exercise plenary review and employ the same standard

applicable in the district court.         Davis v. Portline Transportes

Maritime, 16 F.3d 532, 536 (3d Cir. 1994).         We must consider all

of the facts and inferences in the light most favorable to the

nonmoving party.    The moving party can prevail in its motion for

summary judgment only if there is no genuine issue of material

fact and the moving party is entitled to judgment as a matter of

law.   Peters v. Delaware River Port Authority, 16 F.3d 1346, 1349

(3d Cir. 1994).

                            II.    Discussion

           The question of Sullivan's liability under §6672

presents two issues:    whether Sullivan is a responsible person

and whether he willfully failed to collect, truthfully account

for or pay over federal employment taxes.         As we have extensively

discussed the standards for addressing these two issues before,

we will only summarize their salient points.            We will first

address the responsible person issue.



                                     A.



positive balance in the general operating account of no more than
$132,770.43.


                                     6
            A person responsible under §6672 is a person required

to collect, truthfully account for or pay over any tax due to the

United States.    Brounstein v. United States, 979 F.2d 952, 954

(3d Cir. 1992).    "Responsibility is a matter of status, duty, or

authority, not knowledge."     Quattrone Accountants, Inc. v. IRS,

895 F.2d 921, 927 (3d Cir. 1990).     A responsible person need not

have exclusive control over the company's finances, he need only

have significant control.    United States v. Vespe, 868 F.2d 1328,

1332 (3d Cir. 1989).    "A person has significant control if he has

the final or significant word over which bills or creditors get

paid."     Quattrone, 895 F.2d at 927.   In determining whether an

individual is a responsible person, courts also consider other

factors.    These include:   (1) the duties of the officer as

outlined by the corporate by-laws; (2) the ability of the

individual to sign checks of the corporation; (3) the taxpayer's

signature on the employer's federal employment or other tax

returns; (4) the identity of the officers, directors and

shareholders of the corporation; (5) the identity of the

individuals who hired and fired employees; and (6) the identity

of the individual(s) who were in charge of the financial affairs

of the corporation.    Brounstein, 979 F.2d at 954-55.
            Applying the foregoing principles to the present case,

we find that there is a genuine issue of material fact concerning

whether Sullivan had "significant control" over Pat's financial

affairs.    Although the undisputed evidence in this record

establishes that Sullivan functioned as the president of Pat's,

exercised his signature authority on one occasion to sign a

                                  7
corporate check which was applied to Pat's tax liabilities, and

devoted a significant amount of his time to raising capital for

the company, the undisputed evidence also indicates that

Sullivan's control over Pat's financial affairs was significantly

circumscribed by Carrigan and Fendrick.   As the district court

stated in its opinion:
            It is undisputed that Sullivan did not have
          exclusive control over the management of
          Pat's. Both parties agree that defendants
          Carrigan and Fendrick were responsible
          persons who willfully failed to collect and
          pay Pat's withholding taxes. Defendant
          Carrigan was responsible for handling
          financial affairs. Defendant David Fendrick,
          Chief Financial Officer, maintained all of
          Pat's books, records, and bank accounts.
          Defendants Carrigan and Fendrick handled all
          creditors' inquiries and bills. Defendant
          Fendrick prepared and filed all federal
          income and employment tax returns. Defendant
          Fendrick also directed all negotiations with
          the IRS regarding the unpaid tax liabilities.
          Sullivan did not participate in any meetings
          with the IRS.

            Additionally, Sullivan did not own stock in
          Pat's, he never signed Pat's tax returns, he
          never negotiated with creditors on behalf of
          Pat's, and he had no independent authority to
          hire or fire employees without the consent of
          defendant Carrigan.

            Sullivan was authorized to sign checks on
          behalf of Pat's with respect to the payroll
          account and the general operating account.
          However, the corporate books, records and
          checkbooks were locked in an office, and
          Sullivan did not have his own key. He signed
          only one check on behalf of the company. In
          July 1985, Sullivan signed a corporate check
          in the amount of $9,451.61 which was applied
          to Pat's outstanding tax liabilities for the
          third quarter of 1985.




                               8
           In light of the foregoing facts that Sullivan was not

responsible for handling the financial affairs of the company,

did not prepare, maintain, or have access to any of the corporate

books, records or checkbooks, did not prepare or sign any

corporate tax returns, and did not handle any creditors' bills or

inquiries nor negotiate with any creditor on behalf of Pat's, it

cannot be said as a matter of law that he had significant control

of the company's financial affairs.       Based on all the evidence of

record, we hold that a reasonable jury could find that Sullivan

was not a responsible person.      Anderson v. Liberty Lobby, Inc.,

477 U.S. 242 (1986).    We conclude, therefore, that the district

court erred in granting summary judgment in favor of the United

States on this issue.



                                   B.

           We next consider whether Sullivan willfully failed to

truthfully account for and pay over the taxes due.        The term

willfulness has been interpreted broadly to encompass a range of

actions by responsible persons.        Generally, willfulness is a

"voluntary, conscious and intentional decision to prefer other

creditors over the Government."        Quattrone, 895 F.2d at 928.   In

this regard, "a responsible person acts willfully if he pays

other creditors in preference to the IRS knowing that taxes are

due."   Id.   A responsible person also acts willfully if he

demonstrates a reckless disregard for whether taxes have been

paid.   Vespe, 868 F.2d at 1335.    The "reckless disregard"

standard is met if the taxpayer "'(1) clearly ought to have known


                                   9
that (2) there was a grave risk that withholding taxes were not

being paid and if (3) he was in a position to find out for

certain very easily.'"   Id. (quoting Wright v. United States, 809

F.2d 425, 427 (7th Cir. 1987)).

          Applying these principles to the instant case, we find

that there is a genuine issue of material fact concerning whether

Sullivan willfully failed to pay over the taxes due.   Although

the record establishes that Sullivan lent the company $20,000.00

to pay its creditors, including the IRS, but took no other steps

to direct that the tax liability be paid, the record also

establishes that the one check that Sullivan did sign as

president of Pat's, a check for $9,451.61, was paid to the IRS.

          Additionally, the record before us is not clear

concerning whether the check to the IRS came from the funds lent

by Sullivan or from some other source.   The record is equally

unclear about how much tax was due when Sullivan signed the check

to the IRS.   Likewise, the record does not indicate what

knowledge Sullivan had concerning Pat's tax liability when he

made the $20,000.00 loan.   Given his admittedly limited access to

the company's tax and other financial records, Sullivan may not

have acted with reckless disregard of whether the taxes were

being paid when he took no steps to direct that the $20,000.00 be

applied exclusively to Pat's tax liability.   In light of all the

evidence, we believe that a reasonable jury could find that

Sullivan did not willfully fail to pay over the taxes due.    We

conclude, therefore, that the district court erred in granting

summary judgment in favor of the United States on this issue.

                                  10
                         III.    Conclusion

          For the foregoing reasons, the judgment of the district

court granting summary judgment for the United States will be

reversed and the case will be remanded for further proceedings

consistent with this opinion.0




_________________________________________________________________




0
Sullivan also has appealed the denial of his motion for summary
judgment. Because we have determined that there is a genuine
issue of material fact regarding Sullivan's liability under
§6672, we hold that the district court did not err in denying his
motion for summary judgment.


                                 11
