United States District Court, W.D. Virginia, Lynchburg Division
NORMAN K. MOON, District Judge.
This matter is before the Court on cross-motions for summary judgment. Dkts. 115 & 126. Specifically, the United States of America ("United States" or "Government") brought suit against William Wallis pursuant to 26 U.S.C. § 6672 for failing to pay trust fund taxes for three closely held companies that he allegedly owned and operated: United America Holdings, Inc. ("United"), Boss Management Group, Inc. ("Boss"), and Nitti Family Enterprises, Inc. ("Planet Pizza"). In addition, the Government seeks to impose personal income tax liability on Wallis for the taxable years of 1998, 1999, 2000, and 2002. For the following reasons, I will grant in part and deny in part the Government's motion, while denying the Defendant's motion.
The United States' personal income tax system depends on employers withholding from employees' wages certain "trust fund taxes." Because of the importance of such trust fund taxes, Congress enacted 26 U.S.C. § 6672. Under Section 6672, a "responsible person" in a position to pay the company's taxes will be personally liable for "trust fund taxes" that were not paid, either intentionally or with reckless disregard or indifference to the risk that the taxes might not be paid. Relying on this provision, the Government seeks to hold Wallis personally liable for trust fund taxes concerning three companies: United, Boss, and Planet Pizza.
Wallis and Robert Nitti founded United in 1993. Dkt. 126-50 at 1. United supplied tote bags to trade organizations and grew to a nearly $2.5 million per year operation. Id. When United suffered a severe cash shortfall, it lost its credit terms with its suppliers thus causing it to become insolvent. Id. at 2-3. After shifting sales to Boss, Wallis set up United for chapter 11 bankruptcy. This left United with its debt, but protected United's sale operations and revenue from its' creditors. See Tr. Wallis at 51:24-52:9. This plan succeeded as United earned $2, 478, 352 in 1999. Dkt. 126-49. However, United was not able to complete its planned chapter 11 reorganization because its tax debt was too great. Dkt. 27-6 at 50. Therefore, it converted to chapter 7 and ended on January 3, 2002.
In 2000, Wallis founded Boss and had United shift its marketing operation to Boss. Dkt. 126-36 at 7. While the signature of Boss's articles of incorporation are illegible, Wallis admitted to incorporating Boss and asked this Court to find that he was the incorporator and 100% owner in a 2005 lawsuit. See Wallis v. Eastern Mfg. Corp., No. 7:05-cv-174, Compl. (W.D.Va. 2005). This Court agreed and found Wallis to be Boss' incorporator and owner. See id. at Dkt. 3. During the chapter 11 bankruptcy of United, Wallis tried to purchase Fabriko, a Wisconsin based competitor of United and Boss. See Dkt. 126-66, at 2-3. Wallis negotiated this purchase with at least one financier and the seller on behalf of both United and Boss. Id. Eventually, he effected the acquisition using a "clean" company of which he was president. Id. After missing out on the acquisition, Boss operated for just over a year before Wallis moved its sales and employees into another closely held company and let it "float." Tr. Brown 35:4-24, 39:8-19.
Wallis and Nitti co-owned Nitti Family Enterprises, also known as Planet Pizza. Dkt. 126-50 at 3. The company provided revenue for United. Wallis served as an officer of Planet Pizza and also helped make important corporate decisions, such as choosing its name. Dkt. 126-34 at 2; Tr. Shaw 51:23-52:5. On January 29, 2001, Planet Pizza filed for bankruptcy. Dkt. 126-39 at 3. In the creditors' meeting report, the Trustee of Planet Pizza noted that Planet Pizza, along with United, were seeking bankruptcy in part due to unpaid taxes. Dkt. 126-45.
On or about June 22, 1998, the Internal Revenue Service ("IRS" or "Service") assessed employment tax liabilities for the quarter ending March 31, 1998 against United. See Blunt Decl. at ¶ 24. The Service made additional employment tax assessments against United on December 21, 1998, and April 5, 1999, for various quarters. See Id. at ¶¶ 25, 26. The Service assessed employment tax liabilities against Planet Pizza on December 14, 1998, September 13, 1999, and February 7, 2000, for various quarters. See Id. at ¶¶ 17-20. Thereafter, the Service made additional assessments against United, Planet Pizza, and Boss. See e.g., Dkt. 27-6, at 41. After each assessment, the Service alleges that they gave proper notice and demanded payment. Blunt Decl. ¶¶ 16, 23.
In addition to the trust fund taxes owed through these companies, the United States has also brought this action to recover personal income taxes from Wallis for the taxable years 1998, 1999, 2000, and 2002. See Dkt. 126 at 24; see also Dkts. 126-57, 126-58, 126-60, 126-63.
This case is now before me on cross-motions for summary judgment. Dkts. 116 and 126. Through hundreds of pages of briefing, exhibits, and deposition transcripts, each party argues that no genuine dispute of material fact exists and, therefore, summary judgment should be entered in its favor. For the reasons stated below, summary judgment will be granted in part for the Government and denied in part. Defendant's motion for summary judgment will be denied.
II. Legal Standard
a. Summary Judgment
Summary judgment is warranted if the Court concludes that no genuine issue of material fact exists for trial and that the moving party is entitled to judgment as a matter of law, based on the totality of the evidence, including pleadings, depositions, answers to interrogatories, and affidavits. Whiteman v. Chesapeake Appalachia, L.L.C., 729 F.3d 381, 385 (4th Cir. 2013) (citing Fed.R.Civ.P. 56). A genuine issue of material fact exists "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986).
To demonstrate that a genuine issue of material fact exists, a party may not rest upon his own mere allegations or denials. Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). Rather, the party must "proffer sufficient proof, in the form of admissible evidence, that could carry the burden of proof of his claim at trial." Mitchell v. Data Gen. Corp., 12 F.3d 1310, 1316 (4th Cir. 1993). To this end, a district court has an "affirmative obligation... to prevent factually unsupported claims [or] defenses' from proceeding to trial." Felty v. Graves-Humphreys Co., 818 F.2d 1126, 1128 (4th Cir. 1987) (quoting Celotex, 477 U.S. at 323-24).
b. Section 6672 Liability
Employers must withhold income and social security taxes from the wages paid to employees. See 26 U.S.C. §§ 3402, 3102. These "withholdings taxes are not simply a debt; they are part of the wages of the employee, held by the employer in trust for the government." Gephart v. United States, 818 F.2d 469, 472 (6th Cir. 1987); see also Erwin v. United States, 591 F.3d 313, 319-21 (4th Cir. 2010). In addition, these withholdings are "for the exclusive use of the Government and not to be used to pay the employer's business expenses, including salaries, or for any other purposes." Erwin, 591 F.3d at 319-21. Furthermore, the United States cannot be made "an unwilling partner in a floundering business" through a person making a decision "as a matter of sound business judgment" not to pay trust fund taxes. Erwin, 591 F.3d at 319-21. To ensure that this does not occur, federal law "assure[s] compliance by the employer of its obligation... to pay" trust fund taxes and allows for such employer to be held responsible for a decision not to withhold payment. Id. Personal liability of the failure to withhold taxes extends to any person who: (1) is deemed "responsible" for the collection and payment of trust fund taxes and (2) "willfully fail[s]" to ensure that the taxes are paid. Id. Under this inquiry, courts regard summary judgment as a "favored mechanism to secure the just, speedy, and inexpensive determination" of § 6672 liability. Plett v. United States, 185 F.3d 216, 223 (4th Cir. 1999).
In addition to the intricacies of § 6672 liability, certain overarching tax principles are relevant in the inquiry. First, tax assessments carry a presumption of correctness. See Winstead v. United States, 109 F.3d 1245, 1251 (4th Cir. 1987). This presumption is established when the Service shows that an assessment has been made against the taxpayer. See Higginbotham v. United States, 556 F.2d 1173, 1175 (4th Cir. 1977). After the Government makes this prima facie showing, the taxpayer has the burden of proof of all elements. See Erwin v. United States, 591 F.3d 313, 319-21 (4th Cir. 2010). This burden requires that the taxpayer come forth with credible evidence. Id .; see also United States v. Janis, 428 U.S. 433, 440 (1976). Taxpayers cannot meet this burden with self-serving testimony or through failing to produce objective proof. See Liddy v. Comm'r, 808 F.2d 312, 316 (4th Cir. 1986); see also Erwin, 591 F.3d at 319-21; Laney v. Comm'r, 674 F.2d 342, 350 (5th Cir. 1982) (holding that a "taxpayer will always... give such [self-serving] testimony"); DeLong v. United States, 1997 U.S. Dist. LEXIS 4705, at *3-4 (W.D. Va. 1997) ("a taxpayer's uncorroborated evidence is insufficient to overcome the presumption of correctness"). Second, taxpayers are required to keep certain records. 26 U.S.C. §§ 6001, 6011, 6051(a) and (d). If the taxpayer fails to keep such records, he or she is not relieved of its burden. See Erwin, 591 F.3d at 319-21. In addition, "a taxpayer who has abandoned the advantage of mathematical precision by failing to keep adequate records cannot complain that the [Service's] assessment is based on estimates." Jones v. Comm'r, 903 F.2d 1301, 1303 (10th Cir. 1990).
c. Personal Income Tax Liability
Income tax assessments, like 26 U.S.C. § 6672 assessments, represent the Service's determination that a taxpayer owes income tax. 26 U.S.C. §§ 6201, 6203. As with § 6672 assessments, once the United States introduces proof of the assessment, the burden of proof and persuasion shifts to the taxpayer. See Janis, 428 U.S. at 440; Higginbotham, 556 F.2d at 1175. The taxpayer must offer credible proof sufficient to persuade the ...