Hagen v. U.S. (Maryland U.S.D.C.) (Approved for Publication)

Signed April 30, 2007--Memorandum Opinion by Judge Andre M. Davis.

Hagen filed this tax refund action after paying a portion of the amount allegedly due under a trust fund recovery penalty for unpaid payroll withholding taxes. The government counterclaimed for a total of $274,918 in unpaid assessments, penalties and interest for the fourth quarter of 1999 and the third quarter of 2000. Pending are the parties' cross-motions for summary judgment.

Subsequent to Hagen becoming CEO/Board Chairman in 1998 of American Quantum Cycles ("Quantum"), he was alerted that the company had not paid payroll withholding taxes. After achieving compliance, Quantum again lapsed into delinquency. This time, however, Hagen was unable to raise sufficient capital to pay the obligation and was forced to seek a merger with another motorcycle company, which merger ultimately failed. Hagen then left the company in October 2000.

Hagen asserts that certain portions of his former partner's ("Irving") testimony are inadmissible for lack of personal knowledge and, thus, cannot be used as a basis for determining whether summary judgment is warranted. Irving admitted that he had no personal knowledge of whether Hagen signed signature cards for bank accounts and that he lacked personal knowledge that Condon, Quantum's Financial Director, was instructed not to pay employment taxes. As such, the Court found Irving's testimony on these issues could not be considered in any examination of the pending motions.

The remaining portions of Irving's testimony were clearly admissible. Irving did have personal knowledge that Hagen was CEO and the duties Hagen's position entailed, including his power to "periodically dive anywhere and say do it this way." Further, Irving testified that Hagen was regularly briefed on all aspects of Quantum, including the finances, e.g., raising money, banking relationships and "tax things." In short, the testimony that related to the corporate structure or everyday governance of the company was clearly admissible.

Condon's testimony regarding whether Hagen ever signed any Quantum checks was inadmissible because it was related to written instruments not produced by either party. Pursuant to Fed. R. Evid. 1002, to prove the content of a writing, recording, or photograph (i.e., Hagen's signature on checks) required the original writing, recording or photograph. Nevertheless, Condon's testimony regarding Hagen's authority to sign Quantum checks was admissible.

The relevant statute, 26 U.S.C. § 6672(a) provides:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who wilfully fails to collect such tax, or truthfully account for and pay over such tax, or wilfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

Courts have uniformly interpreted this provision to mean that a person can be liable under Section 6672(a) only if (1) he is a "responsible person" under a duty to collect, account for, and pay over trust fund taxes, and (2) he wilfully fails to discharge his duties as a responsible person. A party is not presumed to be a responsible person merely because of his title. The Fourth Circuit has stated that, in determining responsibility under § 6672, the "crucial inquiry [is] whether the person had the effective power to pay taxes -- that is, whether he had the actual authority or ability, in view of his status within the corporation, to pay the taxes owed." Further, § 6672 applies to all responsible persons and not just the most responsible person.

Hagen was Quantum's CEO and Board Chairman and directed what bills to pay and how to pay them. Hagen, himself, admitted that he gave instructions as to how payroll and other expenses should be handled after the taxes for the first quarter of 1999 were not paid. "[A] person has significant control if he has the final or significant word over which bills or creditors get paid." Quattrone Accounts, Inc., v. U.S. Although Hagen never physically signed the checks, he had the power, as Quantum's CEO, to order which checks to issue.

In further consideration, liability arises only from a "wilfull" violation. The Fourth Circuit has stated that "wilfullness," as defined by § 6672, means actual or constructive knowledge that taxes were unpaid. Specifically, the "failure to pay trust fund taxes cannot be wilfull unless there is either 'knowledge of nonpayment or reckless disregard of whether the payments were being made.'" One way in which wilfullness may be established is to show that the responsible person made a "voluntary, conscious and intentional decision to prefer other creditors over the government." Even assuming Hagen may not have known about the second wave of tax deficiencies until late July/early August, his own testimony disclosed that he learned of the tax deficiencies prior to instructing Condon as to which bills were to be paid and in what order -- none of which included the United States.

Because Hagen is a responsible person under § 6672 and he wilfully failed to pay withheld taxes to the IRS, the motion of the United States for summary judgment was granted and Hagen's motion denied.

The Full Opinion is Available in PDF.