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July 27, 1995

B.C. GITCHO, Plaintiff and Counter-Claim Defendant
UNITED STATES OF AMERICA, Defendant and Counter-Claimant, vs. JAMES G. SILL, Additional Counter-Claim Defendant.

The opinion of the court was delivered by: GERALD B. COHN


 Pursuant to 28 U.S.C. § 636(c), the parties have consented to final entry of judgment by a United States Magistrate Judge. An Order of Reference was entered by Chief Judge J. Phil Gilbert on November 15, 1993.

 Plaintiff, filed this cause of action pursuant to Title 28, United States Code § 1346 on August 13, 1991.

 Before the Court is defendant's Motion for Judgment as a Matter of Law, filed June 21, 1995, pursuant to Fed. R. Civ. P. 50, which the Court will construe as a Motion for Summary Judgment, pursuant to Fed. R. Civ. P. 56(b). The Court, at the request of the parties, will rule on this motion without hearing.

 The task before this Court is necessarily a limited one when ruling on a motion for summary judgment. It has been firmly established by the Seventh Circuit that a grant of summary judgment is proper if there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Wainwright Bank and Trust Co. v. Railroadmens Federal Savings and Loan, 806 F.2d 146, 149 (7th Cir. 1986). Furthermore, to preclude summary judgment, the non-moving party must show the disputed fact to be outcome determinative under the applicable law. Id. at 149. However, the mere existence of a disputed fact is not, in and of itself, enough to withstand a motion of summary judgment. Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S. Ct. 1348, 89 L. Ed. 2d 538 (1986). The Seventh Circuit clarified the standard further in Collins v. Associated Pathologists, Ltd.,


The existence of a triable issue is no longer sufficient to survive a motion for summary judgment . . . the test for summary judgment is whether sufficient evidence exists in the pre-trial record to allow the non-moving party to survive a motion for directed verdict.

 844 F.2d 473, 476 (7th Cir. 1988), cert. denied, 488 U.S. 852, 109 S. Ct. 137, 102 L. Ed. 2d 110 (1988). The burden is upon the moving party to show, on the basis of the pleadings and supporting documents, that there is no genuine issue of material fact in dispute. Rose v. Bridgeport Brass Co., 487 F.2d 804, 808 (7th Cir. 1973).

 On June 8, 1987, the plaintiff, B.C. Githcho, formed a corporation under Illinois law known as ACG development, Inc. The corporation was formed to develop and operate two Mazzio's Pizza Restaurants at the urging of counterclaim defendant, James G. Sill. In forming this corporation, the plaintiff was the sole incorporator, sole shareholder, registered agent and one of the directors. After incorporating, ACG Development established four bank accounts with the plaintiff as a signatory on each of the accounts.

 After forming the business, the plaintiff delegated day-to-day operation of the business to James G. Sill. Sill was delegated responsibility for hiring, firing and training of employees; handling all purchases; payments to suppliers and employees; cash management; paying taxes and filing tax returns. Despite delegating all these responsibilities, the plaintiff still retained final control of the corporation.

 Beginning in 1988, ACG Corporation incurred unpaid withholding tax liabilities for the second, third and fourth quarters. In 1989, ACG also failed to pay withholding taxes for the second, third and fourth quarters. Finally, ACG failed to pay the withholding taxes for the first quarter of 1990. According to records submitted to the Court, ACG failed to pay withholding taxes in the amount of $ 129,137.69.

 On October 27, 1989, the plaintiff met with a representative of the Internal Revenue Service, Brenda Boyer. During that meeting, the plaintiff was informed about ACG's outstanding employment tax liabilities. Plaintiff claims that Ms. Boyer stated the amount owed at the meeting as between $ 80,000 and $ 90,000 and that James Sill, as the manager of ACG would be liable for all employment taxes owed prior to the meeting on October 27, 1989.

 It is unquestioned that subsequent to the meeting of October 27, 1989, ACG continued to operate its pizza businesses. After that date, ACG received over $ 700,000 in gross receipts from November 1, 1989, through December, 1989, from pizza, beer and sandwich sales. During that same time period, ACG paid in excess of $ 130,000 dollars to other creditors despite the outstanding tax liabilities. As a result of the payment of other creditors in preference to the claims of the United States, the Internal Revenue Service assessed the plaintiff for the unpaid tax liabilities pursuant to 26 U.S.C. § 6672.

 A taxpayer is responsible within the meaning of § 6672 if he retains the power within the corporate structure for seeing that the withheld taxes are remitted to the Government. Monday v. United States, 421 F.2d 1210, 1214 (7th Cir. 1970). Authority turns on the scope and nature of an individual's power to determine how the corporation conducts its financial affairs; the duty to ensure that withheld employment taxes are paid overflows from the authority that enables one to do so. See United States v. Running, 7 F.3d 1293 (7th Cir. 1993); Bowlen v. United States, 956 F.2d 723, 728 (7th Cir. 1992); Purdy Co. of Ill. v. United States, 814 F.2d 1183, 1188 (7th Cir. 1987). See also, Raba v. United States, 977 F.2d 941, 943 (5th Cir. 1992).

 The existence of such authority, irrespective of whether that authority is actually exercised, is determinative. Muck v. United States, 3 F.3d 1378 (10th Cir. 1993); Kizzier v. United States, 598 F.2d 1128, 1132 (8th Cir. 1979). Similarly, an otherwise responsible person does not avoid liability under section 6672 by delegating his authority to another. Bowlen, supra; E.g. Thomsen v. United States, 887 F.2d 12, 17 (1st Cir. 1989); Kizzier, supra at 1132 (corporate officer was responsible person despite his having delegated day-to-day operations to a manager)

 As sole shareholder, president, and director of ACG Development, Inc., Mr. Gitcho retained the power to see that the withheld taxes were remitted to the United States. This was the case from the time the business opened in 1987, until Mr. Gitcho closed its operations in early 1990. As a signatory on each of the corporate accounts he had the ability to exercise his responsibility. Thibodeau v. United States, 828 F.2d 1499, 1506 (11th Cir. 1987).

 Under the law, plaintiff, as sole shareholder, incorporator and director of ACG, meets the definition of responsible person. While the plaintiff asserts that James Sill was the responsible party due to this position as manager of the day-to-day operations of ACG, it is clear that, at best, the plaintiff and Sill were both responsible for the debt.

 The next question to be addressed concerns whether plaintiff's payment of funds to other creditors in preference to the United States, meets the definition of willfulness. An individual acts willfully who permits funds of the corporation to be paid to other creditors when he is aware that withholding taxes due to the government have not been paid. Running v. United States, 7 F.3d 1293, 1298 (7th Cir. 1993). Liability does not depend on the presence of a bad motive or the specific intent to defraud the Government or deprive it of revenue. Domanus v. United States, 961 F.2d 1323, 1325-1326 (7th Cir. 1992); Monday v. United States, 421 F.2d 1210 (7th Cir.), cert. denied, 400 U.S. 821, 91 S. Ct. 38, 27 L. Ed. 2d 48 (1970).

 It is a settled proposition in the Seventh Circuit that in the case of individuals who are responsible persons both before and after withholding tax liability accrues, there is a duty to use unencumbered funds acquired after the withholding obligation becomes payable to satisfy the obligation. Garsky v. United States, 600 F.2d 86, 90-91 (7th Cir. 1979), citing Mazo v. United States, 591 F.2d 1151, 1154 (5th Cir. 1979), cert. denied, 444 U.S. 842, 100 S. Ct. 82, 62 L. Ed. 2d 54 (1979); Purdy Co. v. United States, 814 F.2d 1183, 1188 (7th Cir. 1987). In other words, having learned of a withholding tax arrearage, a responsible person is required to commit all after-acquired unencumbered funds to satisfy the accrued withholding tax liabilities that have arisen during the responsible person's tenure even before he learned of the tax arrearage. Permitting the corporation to pay the unencumbered funds to other creditors in preference to the United States after learning of the tax arrearage makes the responsible officer willful as a matter of law. Id.; See also, Honey v. United States, 963 F.2d 1083, 1089 (8th Cir. 1992).

 The plaintiff, by virtue of his corporate position, was responsible for the payment of withholding taxes to the United States. It is clear that subsequent to plaintiff's meeting on October 27, 1989, with Brenda Boyer, that ACG Development, Inc. used after-acquired funds to pay creditors in preference to the United States. By permitting the corporation to pay its other creditors in preference to the United States at a time when he admittedly knew about the tax arrearage, Mr. Gitcho meets the test of willfully failing to pay the withholding taxes pursuant to 26 U.S.C. Section 6672.

 Plaintiff asserts that he has not acted willfully in failing to pay the United States. Plaintiff claims that he acted upon the representations of Brenda Boyer that he was only responsible for payment of withholding which accrued subsequent to their meeting of October 27, 1989. Even crediting every aspect of Mr. Gitcho's recollection of his conversation with Ms. Boyer, and ascribing to Mr. Gitcho the asserted mental state that he was not responsible for the payment of employment taxes for the period of time prior to October 27, 1989, Mr. Gitcho has still acted willfully within the meaning of the law. Willfulness, in the civil context, requires only that an individual's decision to pay creditors other than the United States be the product of "voluntary, conscious and intentional--as opposed to accidental--decisions not to remit funds properly withheld to the Government." Domanus, supra at 1324, citing Monday v. United States, 421 F.2d 1210 (7th Cir.), cert. denied, 400 U.S. 821, 91 S. Ct. 38, 27 L. Ed. 2d 48 (1970).

 The Seventh Circuit clearly articulated this definition of willfulness in its Monday decision, and rejected the argument that a responsible officer's breach of duty might be the product of "reasonable cause" and therefore not willful. Monday, supra; Accord, Muck v. United States, 3 F.3d 1378 (10th Cir. 1993); Olsen v. United States, 952 F.2d 236, 241 (8th Cir. 1991); Harrington v. United States, 504 F.2d 1306, 1315-16 (1st Cir. 1974). Only the Fifth Circuit Court of Appeals has recognized the possibility of a reasonable cause defense to willfulness. Mazo v. United States, 591 F.2d 1151, 1154 (5th Cir.), cert. denied sub nom. Lattimore v. United States, 444 U.S. 842, 100 S. Ct. 82, 62 L. Ed. 2d 54 (1979). However, even there, "no taxpayer has yet carried that pail up the hill." Bowen v. United States, 836 F.2d 965, 968 (5th Cir. 1988).

 The plaintiff was responsible for the payment of ACG's employment tax liabilities. Failure to pay those arrearages amounts to willfulness as defined by 26 U.S.C. § 6672. While plaintiff's failure to pay those liabilities may have been his reliance on the allegedly erroneous statements of Brenda Boyer, he is nonetheless liable to the United States for the unpaid penalties provided by 26 U.S.C. § 6672 in the amount of $ 129,037.69, plus interest thereon accruing after June 24, 1991, pursuant to 26 U.S.C. §§ 6601, 6621 and 28 U.S.C. § 1961(c) until paid.

  Accordingly, for the above-stated reasons, IT IS THE ORDER of this COURT that defendant's Motion for Summary Judgment is hereby GRANTED and the Clerk of this Court is directed to enter judgment for the defendant and against the plaintiff in the amount of $ 129,037.69 plus interest from June 24, 1991.

 Date this 27th day of July, 1995.




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