The opinion of the court was delivered by: Sue E. Myerscough, U.S. District Judge
Thursday, 02 June, 2011 09:46:00 AM Clerk, U.S. District Court, ILCD
The Court now considers Defendant/Counterclaimant United States' Motion for Summary Judgment Against Plaintiff Michael F. Suhadolnik (the "Motion"). For the reasons stated below, the Motion is DENIED IN PART AND ALLOWED IN PART.
The Internal Revenue Code requires an employer to deduct and withhold income and social security taxes from the wages paid to employees. See 26 U.S.C. §§ 3102(a) and 3402(a); see also, Slodov v. United States, 436 U.S. 238, 242-43 (1978). These so-called "trust fund taxes" (a/k/a "withholding taxes"), which include amounts owed under the Federal Insurance Contributions Act (FICA), are for the exclusive use of the United States and are not to be used as working capital for the business or to pay the employer's business expenses, including payroll. 26 U.S.C. §§ 3102(b), 3403, 7501(a); see also United States v. Energy Resources Co., Inc., 495 U.S. 545, 546-47 (1990) (since federal law requires employers to keep these funds in "trust for the United States" pursuant to 26 U.S.C. § 7501(a), the funds are commonly referred to as "trust fund" taxes). Employers are required to report the amount of withheld taxes on a payroll tax return (Form 941). See 26 C.F.R. § 31.6011(a)-4(a)(1). A Form 941 payroll tax return must be filed every calendar quarter and is generally due on the last day of the first month following the quarter. See 26 C.F.R. § 31.6071(a)-1(a). When employers fail to pay trust fund taxes, the United States is deprived of that revenue and incurs an unfunded Social Security and Medicare liability. Therefore, 26 U.S.C. § 6672 provides that: "[a]ny person required to collect, truthfully account for and pay over such tax, . . . shall . . . be liable for a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over." Id.
The United States (the "Government") informed Mr. Suhadolnik that he is liable for trust fund recovery penalties assessed against him as a result of the nonpayment of withholding taxes owed for employees of Mr. Suhadolnik's now defunct company, CX Construction of Central Illinois, Inc. ("CX"). Mr. Suhadolnik responded by suing the Government, arguing that he has no liability and is actually entitled to a $938.96 refund (plus interest and costs) for taxes the Government wrongly collected. The Government counterclaimed against Mr. Suhadolnik and James Yagow (an accountant who formerly worked for CX), pursuant to 26 U.S.C. § 7401. The Government alleged the men were jointly and severally liable for CX's failure to pay trust fund liabilities from July 1, 2005, though December 31, 2007, in the amount of $263,628.71, plus interest.
Mr. Suhadolnik founded Construx Construction of Central Illinois ("Construx") in the late 1970s and grew the company into a business with multiple related corporations, including Crazy Horse Concrete ("Crazy Horse"), CDG Architects ("CDG"), and Superior Walls. Construx experienced a financial decline and went bankrupt. In 2005, Mr. Suhadolnik founded CX and served as its chief executive officer. Due to concern that his personal creditors would interrupt CX's business activities if he was designated as CX's owner, Mr. Suhadolnik made his wife, Maureen Suhadolnik, the owner of CX.
From its start, CX had limited capital, no operating line of credit, and no contracts to perform work. There were doubts as to CX's financial viability. CX did not garner a significant contract until 8 months after the company was created. Mr. Suhadolnik was not paid a salary for his work at CX. However, he agreed to pay former Construx employees Bill Shomidie, Jack Davis, and Jim Yagow salaries comparable to those they received while working for Construx. During their time at CX, accountants Mr. Shomidie and Mr. Yagow each earned approximately $112,500.00 annually while Mr. Davis-who handled CX's operations-earned less. Mr. Suhadolnik also hired Kim Brockhouse, Chrissy Simpson, and Gwen Hilligoss as part of CX's support staff.*fn2
Mr. Suhadolnik knew that certain employees periodically went without pay. CX reported a loss every year it was in operation.
While Maureen Suhadolnik was CX's nominal owner, Mr. Suhadolnik was the one who generated business, met with customers and designers, estimated projects, organized time schedules, monitored the progress of projects, and met with field staff, hired and fired employees, was a signatory on one of CX's two bank accounts, reviewed CX's income tax returns, decided where to locate the company's office, set agendas, and directed the payment of certain bills. Mr. Suhadolnik also set CX's financial policy and scrutinized its expenses. He was CX's ultimate authority.
Although Mr. Suhadolnik was informed at various points that CX had substantial outstanding payroll tax obligations for a period spanning July 1, 2005, though December 31, 2007, he failed to pay the taxes. Instead, he used CX's funds to pay the company's rent and other expenses.
CX struggled financially, but Mr. Suhadolnik nevertheless used assets to subsidize his wife's business-a Gold's Gym fitness center-,his other companies, and his personal legal battles. In January 2008, after the State of Illinois and the Internal Revenue Service (IRS) began investigating why CX had not paid its withholding taxes, Mr. Suhadolnik failed to pay CX's past due federal withholding taxes even though the company had approximately $375,000 in revenue that year.
Mr. Suhadolnik specifically requested that withholding taxes be addressed at CX's weekly meetings, but he never requested updates about the withholding taxes when employees included them in the reports. The IRS appeared as an agenda item for at least one of the weekly meetings and a number of CX's employees recalled discussing the unpaid withholding taxes on various occasions. Moreover, Mr. Suhadolnik was presented with various balance sheets also showing substantial amounts of liability for FICA and federal withholdings.
Rather than pay CX's taxes, Mr. Suhadolnik paid payroll and other CX expenses. He paid his wife more than $19,000. He also started a new construction business called CXP Construction of Central Illinois, allegedly to avoid the effect of an IRS levy. To keep CX's operations intact, Mr. Suhadolnik personally directed that certain expenses, including rent, legal costs, ...