Fowler v. United States ex rel. Internal Revenue Service

Citations: 820 F. Supp. 1390; 71 A.F.T.R.2d (RIA) 2027; 1993 U.S. Dist. LEXIS 6540Docket: No. 92-CV-0091-B

Court: District Court, D. Wyoming; May 3, 1993; Federal District Court

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The case involves a refund suit initiated by plaintiffs Robert G. Fowler and Sharon K. Fowler to recover overpayments related to tax liability assessed against Robert G. Fowler as a responsible person under 26 U.S.C. § 6672 for taxes owed by CTD, Inc. The IRS also assessed this tax liability against third-party defendant Danny R. Harman, totaling $11,286.80. If the plaintiffs are awarded a refund, the United States seeks judgment against Harman.

Key findings include:

- Robert and Sharon Fowler reside in Natrona County, Wyoming. 
- The United States, through the IRS, is the defendant and third-party plaintiff, while Danny R. Harman is identified as a third-party defendant.
- The IRS assessed tax liability against Fowler and Harman for willfully failing to collect and pay over taxes during specific quarters in 1983.
- Robert G. Fowler served as Chairman and President of Extractive Fuels, Inc., the parent company of CTD, but was not an officer of CTD. 
- Extractive Fuels acquired CTD in the early 1980s, with all related companies sharing office space in Casper, Wyoming.
- Richard Rowlette was the Chairman and President of CTD and the only person authorized to sign corporate checks. Fowler did not have signatory authority.
- Fowler arranged cash advances for CTD from its parent companies, although CTD also obtained financing from other sources.
- Cash flow management involved discussions between Fowler, Rowlette, and others, but Fowler initially trusted Rowlette to manage CTD’s finances.
- Rowlette's ability to manage was compromised by a drinking problem, which began to affect his performance and behavior shortly after he assumed his role. 

These findings outline the relationships and responsibilities among the parties involved, the financial management of CTD, and the circumstances surrounding the tax assessments.

Rowlette's increasingly aggressive behavior negatively affected communication and professional relationships within the company, particularly with Fowler, Merritt, and Danny Harman, starting in the summer of 1983. Fowler became aware of CTD's payroll tax issues in late 1983 when Harman, the controller, informed him. To assist, Fowler authorized two cash advances to CTD—$8,500 in November 1983 and $15,000 in December 1983—believing these funds would cover the second-quarter payroll taxes. 

In February 1984, after a meeting with an IRS agent regarding CTD's severe tax deficiencies, Fowler learned that the advanced funds had not been used for their intended purpose. By this time, Fowler's relationship with Rowlette had completely broken down, mirroring Rowlette's strained ties with others in the office. 

Danny R. Harman, the treasurer/controller of CTD and a certified public accountant, held significant financial oversight, including checkbook control and tax return preparation, despite Rowlette's name appearing on the returns. Harman became aware of CTD's tax problems as early as 1983, noting that the first-quarter payroll taxes were not paid until August of that year. As Rowlette became more secretive about company operations, Harman found it difficult to access the checkbook, which Rowlette often kept hidden. 

Despite the challenges, Harman communicated CTD's tax issues to Fowler several times, believing that Rowlette lacked the managerial capability to resolve these financial problems. Harman had to adjust salary checks to account for unpaid payroll taxes, and CTD's corporate account consistently overdrew by $8,000 to $10,000 during this period. The previously strong working relationship between Fowler and Harman deteriorated as the situation unfolded.

Harman was aware of his potential personal liability for CTD's taxes and resigned from CTD in February 1984, though he continued to provide services to DM, EF, and VR until resigning from those roles in September 1985 after a conflict with Fowler. The United States acknowledged at a pretrial conference that Sharon K. Fowler is entitled to a pro-rata share of a tax overpayment, specifically a refund of $33,161.19 for the 1982 tax year, with her contribution being $1,486.30 in withholding.

The IRS assessed both Fowler and Harman for CTD's unpaid payroll taxes, with Fowler assessed in March 1988 and making payments exceeding $11,000, while Harman was assessed in 1987 and paid $200 monthly until January 1990, when he was informed he had overpaid by $3,600 and received a refund with interest. The IRS can impose a 100% penalty on any responsible person who willfully fails to withhold payroll taxes under 26 U.S.C. 6672, aiming to ensure timely tax collection. The IRS credits payments to corporate accounts regardless of the payer and notifies concerned parties once penalties are settled, but does not administer penalties equitably among liable individuals.

A letter from the Department of Justice ordered the IRS to reverse previously granted credits to Harman and Fowler without their notification. The law regarding personal liability for unpaid withholding taxes under 26 U.S.C. 6672 requires the IRS to demonstrate that an individual was responsible for tax collection and that their failure to comply was willful. Key factors in determining responsibility include corporate duties, signatory authority, and control over financial affairs.

More than one individual can be liable for a corporation's unpaid wage withholding taxes, specifically those who possess the authority and responsibility to ensure tax payments are made. Personal liability arises when individuals knowingly fail to pay these taxes, and willfulness does not necessitate malicious intent; rather, a voluntary and intentional act suffices. Making payments to other creditors while aware of delinquent withholding taxes establishes willfulness. The definition of a "responsible person" is broad, focusing on one's power to pay taxes, and the burden of proof lies with the individual assessed under Section 6672, who must demonstrate they were not responsible or that their failure to pay was not willful.

Robert G. Fowler was identified as a "responsible person" due to his significant control over corporate finances and his ability to influence capital allocation to CTD. Despite not holding an official title or being authorized to sign checks, Fowler's close ties with CTD and his role in hiring and firing decisions indicated his responsibility. However, the court concluded that Fowler did not act willfully in failing to ensure the payment of withheld taxes, as he did not neglect to investigate or correct mismanagement within CTD. His reliance on Rowlette’s financial reports was deemed reasonable during the relevant period.

Rowlette authorized Harman to pay expenses beyond CTD's tax deficiency in late 1983, despite Fowler having previously advanced funds to CTD under the expectation that Rowlette would allocate them appropriately. While Fowler controlled DM and EF's finances, he could not influence Rowlette’s decisions regarding payments to other creditors. Rowlette's alcoholism deteriorated during this period, contributing to CTD's escalating tax issues. Evidence does not indicate that Fowler knowingly directed payments away from the IRS while taxes were delinquent; rather, Rowlette was responsible for such decisions. The Court found that Fowler did not meet the "willfulness" requirement under the 6672 test for personal liability regarding CTD's payroll taxes, characterizing his actions as negligent at most.

Harman, similarly, was not deemed a responsible person who willfully failed to pay CTD's payroll taxes, as he lacked authority over CTD's financial matters. He expressed opposition to Rowlette's instructions regarding check issuance, which did not account for unpaid payroll taxes. Harman made efforts to inform Fowler and Rowlette of CTD's tax problems, but his supervisors reassured him they would be addressed. His circumstances resembled those of a comptroller who was restricted by higher authority, as noted in case law.

For the 1982 tax year, Robert and Sharon K. Fowler received a tax refund, with Sharon contributing to CTD's withholding. The case highlights the severe implications of Section 6672, which allows the government to impose penalties on individuals responsible for unpaid payroll taxes if they willfully fail to remit them, reflecting a legislative intent to hold such individuals accountable for trust fund violations.

Courts acknowledge the harshness of the statute aimed at ensuring timely payment of withheld employee funds, recognizing that such measures may be necessary to prevent companies from failing before fulfilling their obligations. However, the implementation of these measures can be arbitrary. Testimony from IRS agents highlighted two main issues with current collection procedures under Section 6672: 

1. **Chronic Overpayments**: The IRS's collection process leads to inefficiencies, causing individuals assessed to frequently overpay their penalties. In the case of Fowler and Harman, both overpaid, resulting in the IRS needing to issue refunds with interest. The lack of IRS assistance in equitably dividing penalties among assessors exacerbates this issue, as individuals may not communicate effectively about their payments. Overpayments increase IRS administrative costs and interest expenses, suggesting a need for better management to prevent unnecessary financial strain on both the IRS and the individuals assessed.

2. **Unfairness**: The IRS's collection method creates inequity, as it conflicts with established case law. In this instance, although Harman was initially assessed, Fowler ultimately paid more toward the penalty, not due to greater responsibility but due to the IRS's "pay as much as you can" approach. This discrepancy can lead to further litigation and dissatisfaction among those assessed.

The IRS is positioned to facilitate a fairer distribution of penalties and reduce overpayments by improving its monitoring of payments and the individuals involved, likely resulting in lower administrative costs and providing individuals with access to funds that could assist in settling debts.

Making unequal tax penalty assessments among corporate officers or directors without justification contradicts established court law, which seeks to allocate penalties based on individual responsibility and willfulness. The current assessment process often leads to disputes between the assessed individuals and the IRS, lacking a fair method for distributing penalties. Congress is urged to develop an accounting procedure that equitably records payments made by assessed individuals, aiming to reduce overpayments and litigation.

The Department of Justice wields excessive control over tax credits and abatements. In this case, an order from DOJ's Steve G. Fuerth led to the IRS reversing previously granted tax credits without notifying the affected parties, raising due process concerns, particularly regarding the notice requirement. The court criticized the inconsistency in the government's position, as the IRS agent claimed she was merely following orders.

Evidence presented at trial indicated that Rowlette was responsible for willfully withholding CTD's taxes. The IRS inadequately assessed CTD's financial situation and failed to timely identify the liable parties, suggesting potential negligence on their part. The court determined that the IRS could not recover tax penalties from individuals not found to be both responsible and willful, leading to an order for the IRS to refund tax penalties to Robert G. Fowler and Danny R. Harman, including interest from the date of collection.

The court noted that the current interpretation of the legal standard under Section 6672 offers little leniency for negligence, affirming that a responsible person is not liable for a corporation's taxes if their actions were negligent rather than willful. Fowler, as leader of CTD's parent company, was found to have taken reasonable steps to ensure tax compliance.