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McCloskey v. United States

September 15, 2009


The opinion of the court was delivered by: David Stewart Cercone United States District Judge

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Plaintiff Timothy McCloskey ("McCloskey") filed this action seeking a refund of taxes paid toward an assessment entered against him by the Internal Revenue Service ("IRS") for failure to remit $268,377 worth of withholding taxes on behalf of his small private business W.E. Brosius Company ("Brosius"). McCloskey contends that although he was a responsible person within the meaning of 26 U.S.C. § 6672 of the Internal Revenue Code ("IRC"), he did not willfully fail to pay over the withholding taxes and therefore is not personally liable for those taxes. The United States filed a counterclaim asserting McCloskey has willfully failed to pay the withholding taxes because after learning of the tax delinquencies he paid more than the amount owed to other creditors before remitting partial payment to the IRS. Presently before the court is the United States' motion for summary judgment. For the reasons set forth below, the motion will be granted.

Federal Rule of Civil Procedure 56(c) provides that summary judgment may be granted if, drawing all inferences in favor of the non-moving party, "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law." Summary judgment may be granted against a party who fails to adduce facts sufficient to establish the existence of any element essential to that party's claim, and upon which that party will bear the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317 (1986). The moving party bears the initial burden of identifying evidence which demonstrates the absence of a genuine issue of material fact. When the movant does not bear the burden of proof on the claim, the movant's initial burden may be met by demonstrating the lack of record evidence to support the opponent's claim. National State Bank v. National Reserve Bank, 979 F.2d 1579, 1582 (3d Cir. 1992). Once that burden has been met, the non-moving party must set forth "specific facts showing that there is a genuine issue for trial," or the factual record will be taken as presented by the moving party and judgment will be entered as a matter of law. Matsushita Electric Industrial Corp. v. Zenith Radio Corp., 475 U.S. 574 (1986) (quoting Fed.R.Civ.P. 56 (a), (e)) (emphasis in Matsushita). An issue is genuine only if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242 (1986).

In meeting its burden of proof, the "opponent must do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita, 475 U.S. at 586. The non-moving party "must present affirmative evidence in order to defeat a properly supported motion" and cannot "simply reassert factually unsupported allegations." Williams v. Borough of West Chester, 891 F.2d 458, 460 (3d Cir. 1989). Nor can the opponent "merely rely upon conclusory allegations in [its] pleadings or in memoranda and briefs." Harter v. GAF Corp., 967 F.2d 846 (3d Cir. 1992). Likewise, mere conjecture or speculation by the party resisting summary judgment will not provide a basis upon which to deny the motion. Robertson v. Allied Signal, Inc., 914 F.2d 360, 382-83 n.12 (3d Cir. 1990). If the non-moving party's evidence merely is colorable or lacks sufficient probative force summary judgment must be granted. Anderson, 477 U.S. at 249-50; see also Big Apple BMW, Inc. v. BMW of North America, 974 F.2d 1358, 1362 (3d Cir. 1992), cert. denied, 113 S.Ct. 1262 (1993) (although the court is not permitted to weigh facts or competing inferences, it is no longer required to "turn a blind eye" to the weight of the evidence).

The relevant facts are as follows: McCloskey was the president and sole shareholder of Brosius during the tax periods in question. (Complaint at ¶ 4). McCloskey had delegated a great deal of financial responsibility to his bookkeeper and chief financial officer ("CFO") Kathleen Lawson, including the filing of Brosius' tax returns. (Doc. 29 pg. 2,3). Lawson embezzled over $800,000 from Brosius and failed to remit the employee withholding taxes to the IRS for nineteen consecutive quarters from June 30, 2000 through December 31, 2004.*fn1 (Doc. 28-2 pg. 35). Lawson left McCloskey a resignation letter on September 1, 2004 stating that she was sorry for what she had done. (Lawson letter Doc. 28-4 pg. 2-3). McCloskey admits that he knew upon reading Lawson's letter that she had embezzled funds, but did not know how much. Id. at 34. Brosius received a letter from the IRS, dated September 14, 2004, thanking Brosius for its recent inquiry and informing it that 940 Forms had not been filed for the nineteen quarters.*fn2 (IRS letter, Doc. 23-32 pg. 2). By late September, McCloskey, with the help of his relatives and his accountant, Daniel Goff, had calculated the amount of Lawson's embezzlement to be in the area of $800,000.*fn3 (Doc. 28-2 pg. 35). Once McCloskey became aware of the magnitude of Lawson's embezzlement he knew he could not continue to keep Brosius in business. (Doc. 28-3 pg. 31). McCloskey inquired about filing for bankruptcy, however he was informed by his attorney that he did not have the necessary assets to do this. (Doc. 28-2 pg. 35). The attorney advised McCloskey to begin winding down the business by paying his creditors, his employees, and himself at a reduced rate. Id. at 36. McCloskey began paying off creditors; however, he never remitted payment to the IRS for the unpaid trust fund taxes.*fn4 Id. at 46.

On November 1, 2004 McCloskey entered into a buy/sell agreement and sold company inventory for $240,000. (Doc. 23-30 pg. 2). McCloskey used this money to pay off a personally secured Brosius loan with National City Bank. (Doc. 28-3 pg. 31-33). Between September 3, 2004 and January 31, 2006, Brosius had debits to its bank account in the amount of $828,143. (Doc. 23-36 pg 3 ¶ 13). Funds Brosius received between September 3, 2004 and January 31, 2006 were for goods or services provided by Brosius prior to September 6, 2004. (Id. at ¶ 15).

On March 1, 2005 McCloskey, as President of Brosius, signed and mailed Form 941 returns for Brosius' past due withholding taxes for the nineteen quarters at issue. (Id. at ¶ 17). On September 12, 2005 the United States' Treasury made assessments against McCloskey pursuant to § 6672 for failure to truthfully account for, or pay over the federal income and employment taxes withheld from the wages of Brosius employees for the quarters at issue. (Doc. 4 pg. 31 ¶ 5). McCloskey then paid $51,302.14 towards the tax periods ending in June 30, 2000 through December 31, 2000. (Id. at 33, ¶ 6). His liability for those three tax periods have been satisfied. (Id.). The remaining assessment against McCloskey with penalty, statutory additions, accrued interest and costs as of June 18, 2007 was $325, 695. 42. (Id. at ¶ 10).

Employers are obligated under the IRC to withhold federal income and social security taxes from their employees' wages, and to hold such monies in trust for the United States. See 26 U.S.C. §§ 3102, 3402, 7501. Employers must remit these withheld sums to the government on a quarterly basis. Id. The IRS is required to credit employees for the withheld taxes regardless of whether the employer actually has remitted payment of these funds. In re RIBS-R-US, Inc., 828 F.2d 199, 200 (3d Cir. 1987) (citing Slodov v. United States, 436 U.S. 238, 243, (1978)). As a result of this obligation on the government and to ensure employer compliance, Congress enacted § 6672 of the IRC which imposes a penalty of personal liability, up to 100% of the amount of the taxes due, on responsible persons who wilfully fail to turn over the withholding taxes to the IRS.*fn5

26 U.S.C.A. § 6672(a) (West Supp.1994). By holding responsible persons personally liable for failing to pay over the withholding taxes, § 6672 protects the United States from becoming an unwilling partner in every business that struggles or fails. Lee v. United States, 951 F. Supp. 79, 83 (W.D. Pa. 1997).

In order for personal liability to arise under § 6672, two criteria must be met: (1) the individual against whom the penalty is assessed must be a responsible person, (2) who has willfully failed to pay over the withholding taxes to the IRS. Greenberg v. United States, 46 F.3d 239, 242 (3d Cir. 1994) (citing United States v. Carrigan, 31 F.3d 131, 133 (3d Cir. 1994) & Brounstein v. United States, 979 F.2d 952, 954 (3d Cir.1992)). An individual will be relieved of liability if their conduct fails to meet either element. Greenberg, 31 F. 3d at 242.

A § 6672 assessment against a responsible person is equivalent to the assessment of a tax. Brounstein, 979 F.2d at 954 (citing 26 U.S.C.A. § 6671(a) & In re Ribs-R-Us, Inc., 828 F.2d at 200). Once the IRS assesses a tax, a rebuttable presumption arises that the assessment is correct. Psaty v. United States, 442 F.2d 1154, 1160 (3d Cir.1971). Thus, the plaintiff bears the burden of submitting evidence to show that the § 6672 assessment against him was incorrect by establishing either (1) that he was not a responsible person within the meaning of the statute, or (2) that he did not willfully fail to pay the amount due to the IRS. Brounstein, 979 F.2d at 954 (citing Psaty, 442 F.2d at 1160 & Quattrone Accountants, Inc. v. IRS, 895 F.2d 921, 927 (3d Cir. 1990)).

McCloskey was assessed penalty of 100% of the unremitted withholding taxes due by Brosius. McCloskey does not assert that the amount assessed against him was wrongly calculated. He also does not dispute that he is a responsible person within meaning of § 6672(a). Instead, his dispute centers on the belief that § 6672(b) liability cannot been established because he did not "wilfully fail" to remit the withholding taxes.

To avoid § 6672 liability, McCloskey bears the burden of coming forward with sufficient evidence to prove by a preponderance that he did not wilfully fail to remit the taxes held in trust for the government. See Brounstein, 979 F.2d at 954; accord United States v. Running, 7 F.3d 1293, 1297 (7th Cir.1993); United States v. McCombs, 30 F.3d 310, 318 (2d Cir.1994). The burden on the taxpayer is not relieved when the United States files a counterclaim. Psaty, 442 F.2d at 1159-1160; Brounstein, 979 F.2d at 954. The applicable law and the facts of ...

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