The opinion of the court was delivered by: Dora L. Irizarry, U.S. District Judge
Defendant, the United States of America, moves for summary judgment pursuant to Federal Rule of Civil Procedure 56 on Count I of plaintiff Jacob Bergman's ("Bergman" or "plaintiff") complaint, alleging that plaintiff was a responsible person of the former corporation, Empire State Upholstery ("Empire"), pursuant to § 6672 of the Internal Revenue Code, who willfully failed to collect, or truthfully account for and pay over income and Federal Insurance Contribution Act ("FICA") taxes withheld from the wages paid by Empire for the June 30, 2000 and September 30, 2000 tax periods. Defendant further moves to reduce to judgment a trust fund penalty assessed against plaintiff for the unpaid balance of his § 6672 liabilities for the tax period ending September 30, 2000, in the amount of $12,313.15, plus statutory additions and interest from the dates of assessment. For the reasons set forth below, defendant's motion is granted.
The present suit arises out of Empire's failure to remit to the Internal Revenue Service ("IRS") federal withholding funds in accordance with 26 U.S.C. § 7501(a), and the IRS's efforts to hold plaintiff personally liable for the unremitted taxes, pursuant to 26 U.S.C. § 6672(a). See 26 U.S.C. § 3402 (1988) (requiring withholding of income tax); id. § 3102 (1988) (requiring withholding of tax imposed by FICA).
A. Empire's Organization and Operation
1. Summer 1999 to November 2000
Empire was incorporated in 1995 by plaintiff to engage in the business of furniture upholstery. (Govt.'s Ex. D; Ex. E at 12.) Plaintiff served as Empire's President and Secretary, 100% shareholder, and only member of the board of directors. (Govt.'s Ex. E at 25.) Plaintiff also invested his own funds in Empire. (Id. at 47.) As the sole signatory on Empire's only bank account, plaintiff signed every check that was paid by Empire. (Id. at 13, 20-22; Ex. F, Ex. G.) Plaintiff typically signed the paychecks for Empire's employees on a weekly basis. (Govt.'s Ex. E at 39-40.)
Plaintiff's father, Arthur Bergman, was the sole owner of Design Corner, a furniture refinishing, manufacturing and reupholstering business. (Id. at 17-18.) Empire and Design Corner were located on different floors of the same building. (Id. at 14.) After Arthur was diagnosed with cancer in the summer of 1999, plaintiff and his father combined their businesses and operated under the Empire State Upholstery name until the summer of 2001. (Id. at 14-17, 43.) Design Corner's bookkeeper and accountant took over the internal record-keeping and tax return preparation for the operation following the informal merger. (Govt.'s Ex. H at 11-15, 32.)
The parties dispute the manner in which Empire was organized and operated following the summer 1999 merger. Plaintiff contends that his father assumed complete control and domination over Empire's finances, except for the check-signing function, which remained with plaintiff, while plaintiff managed the manufacturing side of the business. Plaintiff testified that Arthur would review the corporation's bills with the bookkeeper and determine which creditors should be paid. The bookkeeper would then prepare computer-generated checks, and present these checks to plaintiff for signature. (Govt's Ex. E at 56-57; Ex. H at 19-20.) Plaintiff further testified that it was his father's responsibility to pay the taxes. (Govt.'s Ex. E at 53.)
Empire's books and records were kept on a computer "Quick Books" program. Although plaintiff had the right to access the program, he allegedly was unfamiliar with how to use it. (Govt.'s Ex. H at 28-29.) With respect to the mail, Malky Weber, Empire's office manager following the merger, testified that Arthur would pick up the mail on a daily basis until he became too ill to come into the office on a daily basis in or around November 2000. (Id. at 29-30.) Arthur also was responsible for hiring and firing Empire's employees following the merger. (Govt.'s Ex. E at 54.) Plaintiff, however, continued to serve as the registered agent for Empire, personally guaranteed Empire's obligations, and managed Empire's employees with respect to processing furniture orders. (Id. at 28, 57, 70; Ex. H at 16.) Moreover, plaintiff's signature appears on Empire's corporate income tax returns, as well as Empire's quarterly employment tax returns, Forms 941, for the June 30, 2000 and September 30, 2000 tax periods. (Govt.'s Ex. E at 42-43; Ex. J; Ex. K.)
Empire paid creditors other than the government during the second quarter of 2000 (April 2000 to June 2000). (Govt.'s Ex. M; Ex. N; Ex. O.) Empire's bank statement for the month of April 2000 demonstrates that Empire had a negative starting balance of $5,860.57, collected $145,880.89, and made payments to various payees, other than the IRS, in the amount of $125,821.01. (Govt.'s Ex. M.) Empire's May 2000 bank statement demonstrates that Empire had a starting balance of $14,199.31, collected $191,797.69, and made payments to various payees, other than the IRS, in the amount of $150,105.68. (Govt.'s Ex. N.) In the month of June 2000, Empire had a starting balance of $55,891.32, collected $130,320.19, and directed $183,969.76 in payments to various payees other than the IRS. (Govt.'s Ex. O.) In July 2000, Empire made payments to various payees in the amount of $181,714, which included one $12,598 payment to the IRS on July 24, 2000. (Govt.'s Ex. P; Ex. Q.) With respect to the July 24, 2000 payment, plaintiff testified that "[I]f it says 'IRS' I knew it was paid for taxes. My mind probably told me we are paying off the taxes and pay it off. There is money in the account, just pay it off, whatever." (Govt.'s Ex. E at 102.) However, on August 1, 2000, plaintiff signed a Form 941 for the tax period ending June 30, 2000, as "officer" of Empire that was filed with the IRS and showed a balance of $33,260.62. (Govt.'s Ex. B; Ex. J.) No federal tax deposits were made during the quarter, and no payment was made to the IRS with the Form 941 for the tax period ending June 30, 2000. (Govt.'s Ex. A.)
Although the government concedes that Arthur generally directed plaintiff as to which vendors and creditors should be paid by Empire during the time that he was coming into the office on a daily basis, the government contends that it was within plaintiff's power to pay the IRS during the relevant tax periods because plaintiff did not need his father's authority to write a check, as he continued to be the only signatory on Empire's bank account. (Govt.'s Ex. E at 20-22, 40, 45-46; Ex. F; Ex. G.) Moreover, given that plaintiff signed every check paid by Empire, including the quarterly employment tax returns that indicated balances due, the government alleges plaintiff had to have been aware that Empire was not meeting its payroll tax obligations. (Govt.'s Ex. E at 20-22.)
2. November 2000 to Summer 2001
As Arthur's condition deteriorated toward the end of the year 2000, and until the close of business in the summer of 2001, plaintiff had complete control of Empire's finances and access to Empire's books and records. (Id. at 114.) Plaintiff admittedly became aware that Empire was not meeting its payroll tax obligations during that time because he began receiving IRS notices in the mail informing Empire that it was delinquent in its employment tax obligations. (Id. at 44-45, 117.) However, he testified that, during the two months preceding Arthur's death in January 2001, until the summer of 2001, checks were generated by the office staff based on prior procedures and then presented to plaintiff for signature. (Id. at 22-28.) In contrast, the government contends that plaintiff directed the payments of Empire's funds to creditors other than the IRS during the two months preceding Arthur's death and following Arthur's death. (Def.'s 56.1 Stmt ¶¶ 44-46.) In support of its assertions, the government cites to relevant portions of plaintiff's testimony:
Q: Did you choose to not be aware of the tax obligations for the merged company?
A: I don't know what you mean by "choose."
Q: How is it that your father knew but you did not know?
A: Because the way we set it up was it was hard for him to come out and deal with the day to day headaches in the shop, so he told me, "You run that. I will take care of the office work."
Q: But if you are the only one writing the checks -
Q: Signing the checks, then you would know taxes were being paid or not being paid, so you would know if you ...