Opinion
Civil No. 03-3119-CO.
September 20, 2004
ORDER
Plaintiffs filed this action seeking a tax refund. Plaintiffs also seek costs. This court has jurisdiction pursuant to 28 U.S.C. § 1346(a)(1). The parties have executed written consents for entry of final judgment by a magistrate judge (#17). 28 U.S.C. § 636(c). Before the court is defendant's motion for summary judgment (#11).
I. FACTS
In making the following findings of fact, the court considers the evidence in the light most favorable to the non-moving party:
Anthony McGrath and Ross Swartout were partners who operated Shelton Auto Parts ("SAP"). Complaint, ¶ 1.
For the tax period ending September 30, 2000, SAP failed to timely file its federal employment tax return (Form 941), failed to timely make its federal tax deposits, and failed to timely pay its federal employment taxes. Complaint, § 5 and Ex. A, pp. 2-4; Hendon Declaration, Ex. 1. For the tax period ending December 31, 2000, SAP failed to timely file its federal employment tax return (Form 941), failed to timely make its federal tax deposits, and failed to timely pay its federal employment taxes. Complaint, § 12 and Ex. C, pp. 2-4; Hendon Declaration, Ex. 2. For the tax period ending March 31, 2001, SAP failed to timely file its federal employment tax return (Form 941), failed to timely make its federal tax deposits, and failed to timely pay its federal employment taxes. Complaint, § 19 and Ex. D, pp. 2-4; Hendon Declaration, Ex. 3. For the tax period ending June 30, 2001, SAP failed to timely file its federal employment tax return (Form 941), failed to timely make its federal tax deposits, and failed to timely pay its federal employment taxes. Complaint, § 26 and Ex. E, pp. 2-4; Hendon Declaration, Ex. 4. The total amount of penalties only assessed by the Internal Revenue Service in this case is $22,477.63. Hendon Declaration Exs. 1-4.
SAP, and McGrath and Swartout particularly, hired Phyllis Preslar as SAP's bookkeeper and accountant. They delegated to Preslar the responsibility of all of SAP's inhouse accounting and tax functions for periods both prior to the periods at issue in this action and for the periods at issue in this action. Complaint, Exs. A, C-E, p. 2.
In the course of preparing SAP'S partnership tax return for tax year 2000 or 2001 and generally reviewing SAP's books for the 2001 tax year, McGrath and Swartout discovered that SAP had not been timely making its federal employment tax deposits for the period ending September 30, 2000, through the period ending June 30, 2001. Complaint, Exs. A, C-E, p. 2. Once the failure to file and pay was discovered, the problem was fixed, VIZ: McGrath caused the returns to be filed and the assessed tax was paid. McGrath affidavit.
Preslar had performed bookkeeping functions including preparing and filing payroll tax returns and made payroll tax deposits for years prior to 2000 without problem. McGrath affidavit. SAP, and McGrath and Swartout particularly, reviewed Preslar's work only once per year. Complaint, Exs. A, C-E, p. 4. McGrath checked on general business operations at least monthly. McGrath's outside accountant checked on finances and prepared income tax returns annually. McGrath affidavit.
II. LEGAL STANDARD
A moving party is entitled to summary judgment as a matter of law "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issues as to any material fact. . . ." Fed.R.Civ.P. 56©); Freeman v. Oakland Unified Sch. Dist., 291 F.3d 632, 636 (9th Cir. 2002). The court cannot weigh the evidence or determine the truth but may only determine whether there is a genuine issue of fact. Playboy Enters., Inc. v. Welles, 279 F.3d 796, 800 (9th Cir. 2002).
The moving party must carry the initial burden of proof.Celotex Corp. v. Catrett, 477 U.S. 317, 322-24 (1986). The moving party meets this burden by identifying for the court portions of the record on file which demonstrate the absence of any genuine issue of material fact. Id.; Devereaux v. Abbey, 263 F.3d 1070, 1076 (9th Cir. 2001) (en banc). In assessing whether a party has met its burden, the court views the evidence in the light most favorable to the non-moving party. Allen v. City of Los Angeles, 66 F.3d 1052, 1056 (9th Cir. 1995). All reasonable inferences are drawn in favor of the non-movant. Gibson v. County of Washoe, 290 F.3d 1175, 1180 (9th Cir. 2002).
If the moving party meets its burden with a properly supported motion, the burden then shifts to the opposing party to present specific facts which show there is a genuine issue for trial. Fed.R.Civ.P. 56(e); Auvil v. CBS "60 Minutes", 67 F.3d 816, 819 (9th Cir. 1995); see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 n. 4 (1986). If the moving party presents evidence which, taken by itself, would establish the right to a directed verdict at trial, the motion for summary judgment must be granted, in the absence of any significant probative evidence tending to support the opposing party's theory of the case.THI-Hawaii, Inc. v. First Commerce Fin. Corp., 627 F.2d 991, 993-94 (9th Cir. 1980); First Nat'l Bank v. Cities Serv. Co., 391 U.S. 253, 290 (1968). Conclusory allegations, unsupported by factual material, are insufficient to defeat a motion for summary judgment. Taylor v. List, 880 F.2d 1040, 1045 (9th Cir. 1989). Instead, the opposing party must, by affidavit or as otherwise provided by Rule 56, designate specific facts which show there is a genuine issue for trial. Devereaux, 263 F.3d at 1076.
III. DISCUSSION
Defendant moves for summary judgment on the grounds that Shelton Auto Parts' failure to timely file its federal employment tax returns (Form 941), make tax deposits, and pay its federal employment taxes for the quarters at issue was not due to reasonable cause and willful neglect under applicable law. Defendant contends that the assessments were proper and a business' delegation of responsibility to an employee to pay its employment taxes does not constitute reasonable cause. Plaintiffs contend that their reliance on Preslar was not absolute and their reliance on a system that had not failed for a number of years does not amount to willful neglect, and it was reasonable to only do the financial check annually since there were no problems for the prior years. Plaintiffs contend that a genuine issue of fact exists as to the reasonableness of plaintiffs McGrath's and Swartout's behavior. Defendant replies that, even if the facts stated by plaintiff are true, they do not support a finding that reasonable cause exists to abate the penalty assessments because, under applicable law, business taxpayers cannot rely on an agent to comply with their statutory tax duties.
26 U.S.C. § 6651(a)(1), relating to the failure to file a tax return or to pay a tax, provides in pertinent part:
In case of failure —
(1) to file any return required . . . on the date prescribed therefor . . ., unless it is shown that such failure is due to reasonable cause and not due to willful neglect, there shall be added to the amount required to be shown as tax on such return 5 percent of the amount of such tax if the failure is for not more than 1 month, with an additional 5 percent for each additional month or fraction thereof during which such failure continues, not exceeding 25 percent in the aggregate.
Thus, a taxpayer seeking to escape the statutory penalty bears the "heavy burden" of showing that the failure did not result from "willful neglect" and that the failure was due to "reasonable cause." United States v. Boyle, 469 U.S. 241, 245 (1985).
Defendant argues only that plaintiffs' facts fail to demonstrate reasonable cause. A Treasury Regulation provides that a delay in filing a tax return or payment of a tax is due to "reasonable cause" if the taxpayer makes an affirmative showing of all facts demonstrating that the taxpayer "exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time." 26 C.F.R. § 301.6651-1(c)(1). The Supreme Court in Boyle resolved a conflict between the Circuit Courts on the question of "whether a taxpayer's reliance on an attorney to prepare and file a tax return constitutes `reasonable cause' under § 6651(a)(1) of the Internal Revenue Code, so as to defeat a statutory penalty incurred because of a late filing." 469 U.S. at 242. To the extent a "bright line" could be drawn consistent with the statute and regulations, the Court determined that the intent of Congress was to place on the taxpayer "an obligation to ascertain the statutory deadline and then to meet that deadline, except in a very narrow range of situations." Id. at 248, 249-50. The Court found that, while engaging an attorney is plainly an exercise of ordinary business care and prudence prescribed by the regulations, a taxpayer is not relieved of his duty to comply with the statute by reliance on an attorney as his agent. The Court stated: "reliance cannot function as a substitute for compliance with an unambiguous statute," and held that, "The failure to make a timely filing of a tax return is not excused by the taxpayer's reliance on an agent, and such reliance is not `reasonable cause' for a late filing under § 6651(a)(1)." Id. at 251.
In Conklin Bros. of Santa Rosa, Inc. v. United States, 986 F.2d 315, 317 (9th Cir. 1993), a corporate employee employed as office manager/controller in charge of the corporate tax obligations failed to timely make payroll deposits and payments, and to file returns; altered records when IRS assessments were made; and concealed the deficiencies. The Ninth Circuit determined that, although the corporation reasonably assumed that its employee would comply with the revenue statutes, that was a matter between them and did not resolve the matter regarding the corporation's tax obligation. Relying on Boyle, the court found that the corporation could not avoid responsibility by relying on its agent to comply with the revenue statutes. The court noted that the Boyle Court expressly distinguished between a taxpayer's misplaced reliance on an agent to perform a known duty from the taxpayer's disability. Id. at 318 (citingBoyle, 469 U.S. at 248 n. 6). The Ninth Circuit rejected the corporation's argument that the controller's intentional misconduct disabled it from adhering to its timely tax obligation. The court distinguished the facts of In re American Biomaterials Corp., 954 F.2d 919 (3d Cir. 1992), where the Third Circuit found that the corporation's failure to timely file, deposit and pay its employment taxes due to embezzlement by the corporation's chief executive officer, who was also chairman of the board, and its chief financial officer, was excused. The Ninth Circuit in Conklin found that, in Biomaterials, "the criminal conduct committed by corporate officers and the Chairman of the Board of Directors was beyond the corporation's control because they were the control people in the corporate structure [and] Supervision over such control people was not possible," whereas Conklin had control over its controller since she was subject to supervision by the corporation's president and majority shareholder and by its outside accountants. Conklin, 986 F.2d at 318. Thus, the court found that, in the circumstances, Conklin was not disabled in timely complying with its tax obligations and could not rely on its employee or agent in order to escape responsibility for the nonperformance of its nondelegable tax duties. The court found there were no disputed issues of material fact whether Conklin had reasonable cause to avoid the late penalty fees and affirmed the grant of summary judgment in favor of the government. Id. at 319.
The facts here are like those found by the Ninth Circuit inConklin as not disabling the corporation. See San Diego Drywall, Inc. v. United States, No. Civ. 90-0829-R(M), 1993 WL 477942, at *2-*3 (S.D. Cal. Sept. 13, 1993) (finding thatConklin mandated the conclusion that, even assuming that president and co-director and chief financial officer and co-director "exercised ordinary business care and prudence in supervising their disloyal comptroller, the corporation was not disabled — in the sense required by Conklin — from timely payment of its taxes"), aff'd, 56 F.3d 73 (1995). By their own facts, plaintiff McGrath checked on general business operations at least monthly and his outside accountant annually checked on finances and prepared income tax returns and, therefore, Preslar was supervised and was not beyond the partnerships' control.See Conklin, 986 F.2d at 318-19; San Diego Drywall, 1993 WL 477942, at *3. The law since Boyle was decided is that a business cannot delegate the duty of timely filing taxes to an employee in the organization, which would absolve it from a tax penalty. See Conklin, 986 F.2d at 318. Thus, plaintiffs' reliance on Schulken Bros. Paper Stock Co. v. United States, No. CV-75-3829-RJK, 1977 WL 1257 (C.D. Cal. Aug. 29, 1977), is not helpful to them since it was decided prior to Boyle which established a "`bright line rule that reliance on an agent to file a timely return when the due date of return is ascertainable by the taxpayer does not constitute reasonable cause excusing the taxpayer from statutory penalties for late filing.'" Conklin, 986 F.2d at 317 (quoting Biomaterials, 954 F.2d at 923). Under the law, the Court is compelled to find that the partnership and its partners were not disabled from timely complying with its tax obligations and, thus, plaintiffs have not demonstrated reasonable cause to avoid the tax penalty. With some reluctance, the Court grants defendant's motion for summary judgment.
IV. ORDER
Based upon the foregoing, it is ordered that defendant's motion for summary judgment (#11) is granted, and this case is dismissed.
IT IS SO ORDERED.