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Anuforo v. Commissioner of Internal Revenue: US District Court : TAX - trust-fund recovery penalties; business can't pass on its losses to taxpayers

18
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
CYRIL C. ANUFORO,
Plaintiff,
v.
COMMISSIONER OF INTERNAL
REVENUE,
Defendant.
Civil No. 07-1756 (JRT/FLN)
ORDER AFFRIMING AND
ADOPTING ORDER AND REPORT
AND RECOMMENDATION
P. Chinedu Nwaneri, NWANERI & ASSOCIATES PLLC, 2147
University Avenue West, Suite 105, St. Paul, MN 55114-1326, for plaintiff.
Shana M. Starnes, U.S. DEPARTMENT OF JUSTICE, Tax Division,
P.O. Box 7238, Ben Franklin Station, Washington, D.C. 20044-7238, for
defendant.
Cyril C. Anuforo filed an amended complaint on December 21, 2007, against the
Commissioner of Internal Revenue (Commissioner), seeking a declaration (1) that the
trust-fund recovery penalties assessed against Anuforo for failure to pay employment
taxes for two of Anuforos businesses are time-barred, null, and void; and (2) that
Anuforo is not liable for the trust-fund recovery penalties. The Commissioner brought a
motion for summary judgment with respect to one of Anuforos businesses, Comfort Plus
Health Care, Inc., and Anuforo challenged two orders related to the Commissioners
motion.1 In an Order and Report and Recommendation dated July 23, 2008, United
1 The IRS also assessed trust-fund recovery penalties on a second Anuforo-operated
company, U.S. Central Comfort Plus Care Systems, Inc., which is not subject to this motion for
summary judgment.
-2-
States Magistrate Judge Franklin L. Noel (1) denied Anuforos Motion to Compel the
Deposition of Jill Dutcher; (2) denied Anuforos Motion to Expedite the Hearing of the
Motion to Compel the Deposition of Jill Dutcher; and (3) recommended that this Court
grant the Commissioners motion for summary judgment. See 28 U.S.C. 636(b)(1)(B).
Anuforo now objects to the orders and recommendation. The Court reviews the two
challenged orders under the standard of review for nondispositive pretrial matters, 28
U.S.C. 636(b)(1)(A); D. Minn. LR. 72.2 (permitting a district court to modify or set
aside any portion of the Magistrate Judges order found to be clearly erroneous or
contrary to law). The Court reviews the Magistrate Judges recommendation to grant
Commissioners motion de novo, see 28 U.S.C. 636(b)(1)(C); D. Minn. LR 72.2(b).
For the following reasons, the Court overrules Anuforos objections and affirms and
adopts the Order and Report and Recommendation of the Magistrate Judge.
BACKGROUND2
Cyril C. Anuforo organized Comfort Plus Health Care, Inc. on January 20, 1994.
From the date of its organization, Comfort Plus Health Care, Inc. consistently failed to
pay employment taxes. In July 2000, an installment repayment agreement was reached
between Anuforo and the Internal Revenue Service (IRS) to repay the past-due
employment tax. In connection with that agreement, Anuforo signed a Form 2750,
agreeing to extend his liability for failure to pay employment taxes until 2010. In March
2 The facts are repeated below only to the extent necessary to rule on defendants
objection. A more comprehensive statement of facts can be found in the Magistrate Judges
Order and Report and Recommendation. (Docket No. 103.)
-3-
2002, however, the IRS notified Anuforo that he had defaulted on the agreement by
failing to pay currently due employment taxes.
In June 2002, Anuforo sought to have the repayment program reinstated,
reasoning that his failure to pay employment taxes was the consequence of embezzlement
by two of his employees. Despite this apparent financial burden, Comfort Plus Health
Care, Inc. continued to pay creditors from 20012003.
The IRS assessed trust-fund recovery penalties against Anuforo personally for his
failure to pay the Comfort Plus Health Care, Inc. employment taxes for the quarterly time
periods ending on September 30, 1999; March 31, 2002; September 30, 2002, December
31, 2002; March 31, 2003; June 30, 2003; September 30, 2003; and December 31, 2003.
The IRS assessed a total of 5,225.95 in penalties against Anuforo for these time
periods.
In recommending that the Court grant Commissioners motion for summary
judgment, the Magistrate Judges Report and Recommendation found no genuine issue of
material fact as to whether Anuforo was personally liable to the IRS for trust-fund
recovery penalties. Further, the Magistrate Judge concluded that the IRS assessment of
those penalties were not time-barred. Finally, the Magistrate Judge denied Anuforos
motions relating to the motion to compel the deposition of Jill Dutcher, reasoning that
such testimony would not yield information that would alter the Courts conclusion in
favor of the IRS. (Docket No. 103.)
-4-
ANALYSIS
I. STANDARD OF REVIEW
Summary judgment is appropriate where there are no genuine issues of material
fact and the moving party can demonstrate that it is entitled to judgment as a matter of
law. Fed. R. Civ. P. 56(c). A fact is material if it might affect the outcome of the case,
and a dispute is genuine if the evidence is such that it could lead a reasonable jury to
return a verdict for either party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247
(1986). A court considering a motion for summary judgment must view the facts in the
light most favorable to the non-moving party and give that party the benefit of all
reasonable inferences that can be drawn from those facts. Matsushita Elec. Indus. Co. v.
Zenith Radio Corp., 475 U.S. 574, 587 (1986).
The standard of review for an appeal of a magistrate judges order on a
nondispositive issue is extremely deferential. Reko v. Creative Promotions, Inc., 70
F. Supp. 2d 1005, 1007 (D. Minn 1999). The Court will reverse the order only if it is
clearly erroneous or contrary to law. 28 U.S.C. 636(b)(1)(A); D. Minn. LR 72.2(a).
II. FEDERAL EMPLOYMENT TAX PROVISIONS
Under 26 U.S.C. 3102 and 3402, an employer is required to deduct and
withhold Federal Insurance Contributions Act (FICA) and federal income taxes from
its employees wages. These taxes constitute a fund in trust for the United States and
must be paid to the IRS on a quarterly basis. 26 U.S.C. 7501(a); Honey v. United
-5-
States, 963 F.2d 1083, 1087 (8th Cir. 1992). Employers who fail to pay employment
taxes are subject to penalty assessments under 26 U.S.C. 6672(a), which provides:
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 . . . [shall] be liable to a penalty equal to
the amount of tax evaded or not collected or not accounted for and paid
over.
In order to be liable under 6672, an individual (1) must be a responsible person
and (2) must have willfully failed to pay over taxes to the United States. Olsen v. United
States, 952 F.2d 236, 238 (8th Cir. 1991). If those requirements are satisfied, a 6672
penalty assessment is presumed correct, subject to the individuals rebuttal that he was
not a responsible person or did not willfully fail to collect, account for, or pay over taxes.
Riley v. United States, 118 F.3d 1220, 1221 (8th Cir. 1997).
III. TRUST-FUND RECOVERY PENALTIES AGAINST ANUFORO
Before a penalty may be imposed under 6672(a), the IRS must satisfy two
requirements. First, the IRS must notify the individual in writing (by mail) or in person
that they will be subject to an assessment of such penalty. 26 U.S.C. 6672(b). This
notification must precede demand of any penalty by sixty days. Id. 6672(b)(2). Second,
the amount of the trust-fund recovery penalty must be assessed within three years of the
due date of the tax return or within three years of the date when the return is actually
filed, whichever is later. Id. 6501(a). The IRS makes a tax or penalty assessment by
recording the liability of the taxpayer . . . in accordance with rules and regulations
prescribed by the Secretary. 26 U.S.C. 6203.
-6-
A. Assessment of Trust-Fund Recovery Penalties
Anuforo objects to the Report and Recommendation and claims that the IRS failed
to satisfy these two requirements with respect to Comfort Plus Health Care, Inc. As a
result, Anuforo argues that the Court lacks jurisdiction over the matter. Anuforo admits
that the IRS properly provided notice of the trust-fund recovery penalty assessment, but
claims that the IRSs evidence fails to prove that an actual assessment was made.
(Docket No. 108.)
In response to Anuforos argument, the Commissioner provided the Court with
Form 4340 Certificates of Assessments and Payments, which indicate the assessment of
penalties on December 26, 2005, for each time period that Anuforo failed to pay over
trust-fund taxes. (Docket No. 125, Starnes Decl. Ex. A.)
Certificates of Assessments and Payments constitute presumptive evidence that a
tax has been validly assessed. United States v. Gerads, 999 F.2d 1255 (8th Cir. 1993);
Hughes v. United States, 953 F.2d 531, 540 (9th Cir. 1992). Absent a challenge to the
validity of the assessment, Form 4340 is sufficient to establish that the IRS actually and
correctly made the penalty assessment. Id. Anuforo has not challenged the assessment
procedure, so the Court presumes the assessment to be valid.
Thus, the only question left to be determined is whether the trust-fund recovery
penalties were assessed within the time limitations established by 26 U.S.C. 6501(a).
Although employment taxes are reported four times a year on Form 941, the IRS deems
taxes received on April 15 of the succeeding year. See 26 U.S.C. 6501(b)(1). In this
-7-
case, the IRS made its assessments on December 26, 2005, for taxes that were, with one
exception, deemed filed on April 15, 2003 or April 15, 2004. These assessments were all
made within the three-year time limitation. The only penalty assessment made outside of
the time period, for the period ending on September 30, 1999, is excluded from the time
limitation: in agreeing to an initial repayment plan with the IRS in July 2000, Anuforo
signed a Form 2750, which extended his liability for failure to pay employment taxes for
that period until 2010.
B. Willfulness
To be personally liable for the trust-fund recovery penalty, an individual must be a
responsible person and must have willfully failed to pay taxes to the United States.
Olsen, 952 F.2d at 238. A person is an officer or employee of a corporation who has a
duty to collect and remit taxes to the United States or, in other words, is under a duty to
perform the act in respect of which the violation occurs. 26 U.S.C. 6671(b). To be
classified as a responsible person for the purposes of 26 U.S.C. 6672, an individual
must have [r]ecognized indicia of status as a responsible person includ[ing] membership
on the board of directors, ownership of stock in the corporation, the authority to write and
sign checks on the corporate accounts, and other significant authority such as the
authority to hire and fire personnel. In re Grubbe, No. 4-92-8014, 1994 WL 249792, at
*6 (Bankr. D. Minn. Jul. 7, 1994).
Anuforos status as a responsible person is undisputed. Anuforo was the president
of Comfort Plus Health Care, Inc., owned 100% of the company stock, was the only
-8-
person with authority to write and sign checks on corporate accounts, and was the only
person with authority to hire and fire personnel. Anuforo also admitted that he was a
responsible person in his Answers to Requests for Admissions.
Given that Anuforo is a responsible person, Anuforo is personally liable for the
trust-fund recovery penalties if he willfully failed to pay Comfort Plus Health Care, Inc.s
taxes. A responsible person acts willfully . . . whenever he acts or fails to act
consciously and voluntarily and with knowledge or intent that as a result of his action or
inaction trust funds belonging to the government will not be paid over but will be used
for other purposes. Olsen, 952 F.2d at 239 (internal quotation marks omitted). The
term willfully does not connote a bad or evil motive, but rather means a voluntary,
conscious and intentional act, such as payment of other creditors in preference to the
United States. Elmore v. United States, 843 F.2d 1128, 1132 (8th Cir. 1988).
Anuforo objects to the Report and Recommendation, claiming that his failure to
pay trust-fund taxes was not willful and arguing that he has a good defense to the
Magistrate Judges finding of willfulness. While it is not explicitly stated in Anuforos
objection, the Court assumes that this good defense is that Comfort Plus Health Care,
Inc.s employees embezzled money from the company, thus placing Comfort Plus Health
Care, Inc. in a situation whereby they could not pay over trust-fund taxes to the United
States.
Anuforos claim of a good defense can most reasonably be characterized as a
reasonable cause defense. There is no legally recognized reasonable cause defense,
however, for a willful failure to pay taxes. In re Schroeder, No. BK92-41479, 1994 WL
-9-
527177, at *4 (Bankr. D. Neb. June 3, 1994) (noting that, after embezzlement by
company employees, the taxpayer did not have the legal option to pass his losses on to
the taxpayers of the United States). Notwithstanding the embezzlement by Comfort
Plus Health Care, Inc. employees, Anuforo did not have the legal option to withhold a
portion or all of the trust-fund taxes in order to sustain the companys viability.
Without a legally available defense, there is no genuine issue of material fact with
respect to Anuforos willful failure to pay over trust-fund taxes. Anuforo admits, in his
objection to the Report and Recommendation, the voluntary nature of his failure to pay
trust-fund taxes, and his intent to use those resources to pay other company debts.
Anuforo notes that some taxes were paid during the time periods in which the IRS seeks
recovery of penalties, and then notes that not all taxes were paid because [t]he
companies pro-rated their expenses to stay in business. (Docket No. 108.) In other
words, Anuforo admits that he voluntarily and intentionally diverted resources that
should have been held in trust for the United States to pay for other expenses. Moreover,
Comfort Plus Health Care, Inc. was still able to pay creditors from 20012003. In 2001,
Comfort Plus Health Care, Inc. paid 3,594 in wages and salaries and 9,656 in
miscellaneous expenses. (Dutcher Decl. 3234 Ex. 13.) In 2002, Comfort Plus Health
Care, Inc. paid 4,199 in wages and salaries and 6,783 in miscellaneous expenses.
(Dutcher Decl. 3537 Ex. 14.) And in 2003, Comfort Plus Health Care, Inc. paid
4,670 in wages and salaries and 7,675 in miscellaneous expenses. (Dutcher Decl.
-10-
3840 Ex. 15.) As noted above, pro-rating taxes in order to maintain the solvency
of a business is not permitted.3
C. Appeal from the Order Denying the Motion to Compel
Anuforo also objects to the Magistrate Judges order denying the motions to
compel the deposition of Jill Dutcher and expedite the hearing on that motion. Anuforo
argues that he cannot properly respond to the Commissioners motion for summary
judgment without first taking the deposition of IRS agent Jill Dutcher. The Magistrate
Judge disagreed in the Report and Recommendation, stating, The Court concludes that
allowing the Plaintiff to take Ms. Dutchers deposition would not alter the Courts
conclusion in favor of the IRS. The IRS has presented overwhelming evidence, much of
it IRS forms filed and signed by the Plaintiff himself, demonstrating Comfort Plus
failure to pay taxes. (Docket No. 103.)
The Court agrees with the Magistrate Judge and finds no indication that Anuforo
would be able elicit any information from the deposition of Ms. Dutcher that would be
sufficient to create a genuine issue of material fact for the purposes of defeating the
motion for summary judgment. In this case, the Court does not find that Magistrate
Judge Noels resolution of the two motions is clearly erroneous or contrary to law, and
therefore affirms the denial of Anuforos motions.
3 In his objection to the Report and Recommendation, Anuforo also argues that he
cannot be vicariously liable for the criminal conduct of third parties. Anuforo, however, is not
deemed liable for third-party criminal conduct (i.e. the embezzlement of Comfort Plus Health
Care, Inc. funds). Instead, he is held liable for trust-fund recovery penalties, which resulted from
Anuforos own willful failure to pay over employment taxes to the United States.
-11-
ORDER
Based on the foregoing records, files, and proceedings herein, the Court
OVERRULES plaintiffs objections [Docket No. 108] and AFFIRMS and ADOPTS
the Order and Report and Recommendation of the Magistrate Judge dated July 23, 2008
[Docket No. 103].
Accordingly, IT IS HEREBY ORDERED that defendant Commissioner of
Internal Revenues Motion for Summary Judgment [Docket No. 13] is GRANTED.
DATED: September 30, 2008 ____s/ ____
at Minneapolis, Minnesota. JOHN R. TUNHEIM
United States District Judge
 

 
 
 

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