The opinion of the court was delivered by: Oliver W. Wanger United States District Judge
MEMORANDUM DECISION RE DEFENDANT UNITED STATES OF AMERICA'S MOTION FOR SUMMARY JUDGMENT AGAINST PLAINTIFF AND COUNTERCLAIM DEFENDANT WILMA SHORE
Plaintiff Wilma Shore filed suit against the United States seeking a refund and abatement of tax penalties assessed and/or collected against her as the person responsible for Dean's Materials, Inc. and Dean R. Shore, Inc.'s failure to pay its payroll taxes. The government responded with a counterclaim against Plaintiff to reduce to judgment certain trust fund recovery penalties assessed against Plaintiff. The government contends that Plaintiff, as an officer, director and largest shareholder of Dean's Materials, Inc. and Dean R. Shore, Inc., is responsible for payment of these taxes and acted with reckless disregard to the payment of the federal taxes.
The government now moves, pursuant to Federal Rule of Civil Procedure Rule 56, for summary judgment on its counterclaim against Wilma Shore and for judgment in its favor as to the claims made in Plaintiff's Complaint.*fn1 Plaintiff has filed opposition, to which the United States has replied.
This case arises out of the government's attempt to recover unpaid payroll taxes that were required to but were not withheld from the wages of Dean's Materials, Inc. and Dean R. Shore, Inc. employees for eleven tax periods from April 1, 1997 through December 31, 1999. The facts are largely undisputed.
Dean's Materials, Inc. and Dean R. Shore, Inc. evolved out of a small acoustical tile business started in 1960 by Dean R. Shore, Plaintiff's deceased husband. ((Defendant United States' Statement of Disputed Facts ("DSUF") 1).*fn2 ). Dean's Materials, Inc. sold building supplies in Central California under the trade name Construction Materials Suppliers ("CMS"). (DSUF 3.) Dean R. Shore, Inc. was a large commercial acoustical tile, plaster and commercial drywall subcontractor that did business under the name Interior Contractors ("INCON"). (DSUF 4.) Throughout the relevant tax periods at issue in this case, CMS was the parent company and sole shareholder of INCON. (DSUF 7.)
Following Dean R. Shore's death in 1991, Plaintiff became the largest shareholder of CMS and INCON.*fn3 (DSUF 9.) Plaintiff held in excess of 40% of the outstanding shares of CMS and served as co-trustee of two trusts that collectively owned another 40% stake in CMS. (DSUF 17.) Plaintiff was also a director of both CMS and INCON from 1991 until her resignation in 1999.*fn4 (DSUF 11, 20.) During the eleven tax periods at issue, there were two members of the Board of Directors: Plaintiff and her son Gregory Shore.
From 1991 until her resignation in 1999, Plaintiff was the President of CMS and INCON. (DSUF 11, 20.) Under CMS and INCON's bylaws, Wilma Shore, as President of each company, had "general supervision, direction and control of the business and officers of the corporation." (DSUF 13, 22.) The bylaws also authorized Plaintiff, as President of each company, to call special meetings of the Board of Directors and to inspect all books, records, and documents of every kind. (DSUF 15-16, 24-25.)
From 1991 forward, Plaintiff drew a regular salary and retained the right to sign checks on CMS and INCON's bank accounts.*fn5 (DSUF 26, 28.) Although Plaintiff's son, Gregory Shore, ran the daily operations of the business, Wilma Shore reconciled CMS and INCON's bank statements and dealt with outside accounting professionals regarding the preparation of financial statements and corporate disclosure forms. (DSUF 14, 29.) Plaintiff came into the CMS and INCON offices on a regular basis, up to five times per week. (DSUF 27.) Plaintiff also provided substantial funding to the companies, including the 1993 purchase of a $656,907.00 loan obligation that CMS owed to Bank of America. (DSUF 32-33.) In 2000, CMS defaulted on the loan and Plaintiff foreclosed on the real estate collateral, consisting of substantial real property in Redding, California.*fn6
During the second half of her eight-year tenure as president of INCON and CMS, the companies encountered severe financial difficulties and cash shortages. (DSUF 47-55.) It is undisputed that checks bounced, payments were held back, and CMS and INCON failed to timely remit payroll taxes to the Government.*fn7 (Id.) According to the government, Plaintiff knew, or should have known, that CMS and INCON were not withholding taxes in 1997 and early 1998 because four checks payable to the IRS, each in the amount of $25,000, were returned for insufficient funds.*fn8 (DSUF 103.) In 1997 and 1998, there were additional checks, ranging from $10,000 to $140,000, made payable to the IRS that "bounced" for insufficient funds. (Doc. 59, Exhs. 54 & 55.) In April 1998, CMS and INCON ceased all payments, periodic or otherwise, to the IRS for delinquent employee taxes.*fn9 (DSUF 107, 110.)
INCON and CMS retained the accounting firm Hills Renault to prepare annual financial reports for the 1993, 1994, 1995, 1996, 1997, 1998, and 1999 fiscal years. (DSUF 37.) Each year, Plaintiff signed the accountants' engagement and representation letters in connection with the preparation of these financial statements, which were given to CMS and INCON's lenders. (DSUF 37.) In 1996, Hills Renault became concerned about CMS and INCON's financial viability. During an audit in August 1996, Plaintiff was made personally aware of Hills Renault's concerns by Leslie Kos, an accountant at Hills Renault. (DSUF 88.) Kos personally warned Plaintiff that Hills Renault was adding a "going concern" note to the financial statements of CMS and INCON. (Id.) A "going concern" footnote questions the financial viability of the businesses over the ensuing fiscal year. (Id.)
From 1996 forward, CMS and INCON's financial statements contained express references to unpaid payroll taxes, penalties, and interest. (DSUF 53, 112.) For example, the March 31, 1997 financial statement for CMS states: "At March 31, 1997 and 1996, accounts payable and accrued expenses include $122,400 and $139,000, respectively, representing delinquent payroll taxes, penalties, and interest." (DSUF 53; Doc. 59, Exh. 29.) INCON's March 31, 1997 financial statement contained a similar statement: "At March 31, 1997 and 1996, accounts payable and accrued expenses include $311,700 and $550,400, respectively, representing delinquent payroll taxes, penalties, and interest." (DSUF 53.)
CMS and INCON's financial condition continued to decline in 1998. (DSUF 107-114.) According to the financial statements prepared By Hills Renault for the 1998 fiscal year, INCON's delinquent payroll taxes, penalties, and interest totaled $1,192,241. (DSUF 112.) CMS's delinquent payroll taxes, penalties, and interest totaled $243,971. (Id.) Plaintiff's personal financial statement for the 1998 fiscal year, also prepared by Hills Renault, reflected large losses, negative working capital, and the elimination of Plaintiff's book equity in CMS and INCON. (DSUF 113.)
In April 1999, Plaintiff received a copy of a letter from Richard Howard to Ms. Audrey Chan of the Department of Labor in San Francisco. Mr. Howard alleged that the assets of CMS and INCON's profit sharing plan might be at risk, since there "appears to be a serious disregard for compliance with basic ERISA laws by the plan's trustee." (DSUF 111; Doc. 59, Exh. 56.) Mr. Howard also stated that "the trustee does not return my phone calls... [and] the 1997 benefit statements have not been provided." (Id.) The letter was sent to "Mrs. Wilma Shore, Shore Corp. President" via certified mail. (Id.)
In March, June, and July 1999, Plaintiff signed large numbers of payroll checks issued to employees. (DSUF 114; Doc. 59, Exh. 57A, 57B, 57C, 57D.) The payroll checks drawn on July 26, 2009 and signed by Wilma Shore, were the last checks drawn on CMS and INCON accounts. CMS and INCON stopped doing business in 2000.*fn10 (DSUF 115.)
Following an investigation into the delinquent taxes, the IRS assessed trust fund recovery penalties against Wilma Shore relating to CMS and INCON's outstanding payroll liabilities for eleven tax periods from April 1, 1997 through December 31, 1999.*fn11 (DSUF 117.)
The IRS assessed penalties against Plaintiff concerning CMS' unpaid tax liabilities in the amount of $38,867.58 for the second quarter of 1997, $36,346.66 for the third quarter of 1997, $39,647.46 for the fourth quarter of 1997, $25,287.07 for the first quarter of 1998, $25,665.25 for the second quarter of 1998, $26,193.58 for the third quarter of 1998, $23,540.84 for the fourth quarter of 1998, $17,642.23 for the first quarter of 1999, $18,670.89 for the second quarter of 1999, $18,519.88 for the third quarter of 1999, and $19,336.95 for the fourth quarter of 1999. (DSUF 120.)
Concerning INCON, the IRS assessed penalties against Plaintiff in the amount of $106,345.58 for the second quarter of 1997, $155,671.18 for the third quarter of 1997, $124,821.18 for the fourth quarter of 1997, $218,437.67 for the first quarter of 1998, $144,667.76 for the second quarter of 1998, $91,513.87 for the third quarter of 1998, $183,554.25 for the fourth quarter of 1998, $171,853.43 for the first quarter of 1999, $217,007.41 for the second quarter of 1999, $143,344.31 for the third quarter of 1999, and $122,304.55 for the fourth quarter of 1999.*fn12 (DSUF 120.)
As of July 19, 2009, the total outstanding balance of the federal tax liabilities due from Wilma Shore with respect to CMS and INCON for all tax periods at issue, including interest, is $2,983,797.66. (DSUF 120.)
III. PROCEDURAL BACKGROUND
On August 8, 2008, Wilma Shore brought suit against the United States pursuant to 28 U.S.C. § 1346, seeking a refund or abatement of trust fund liabilities assessed personally against her by the IRS. (Doc. 1.) Plaintiff's first cause of action seeks to recover or abate the alleged erroneously withheld sums, stating that she is neither a "responsible party" nor "acted willfully" as described in 26 U.S.C. § 6672. Plaintiff's second cause of action is brought pursuant to an estoppel theory.
On December 17, 2007, the United States filed its Answer to Plaintiff's Complaint and also asserted a counterclaim against Shore. (Doc. 8.) In its counterclaim, the United States sought to reduce to judgment the contested trust fund liabilities assessed against Shore pursuant to 26 U.S.C. § 6672. The United States also raised counterclaims against Gregory Shore and Brenda Reynolds, seeking to recover certain trust fund recovery penalties assessed against them.
On July 20, 2009, the United States filed a Motion For Summary Judgment to reduce to judgment the outstanding federal income tax liabilities assessed against Plaintiff and Counterclaim-Defendant Wilma Shore and Additional Counterclaim-Defendants Gregory Shore and Brenda Reynolds. (Doc. 52.) As to Plaintiff and Counterclaim-Defendant Wilma Shore, the United States seeks to reduce trust fund recovery penalties to judgment and for judgment in its favor as to the claims made in Ms. Shore's Complaint.
The Government seeks to recover $2,983,797.66 from Wilma Shore in unpaid FICA and income taxes for her involvement in the non- payment of payroll tax liabilities for Dean's Materials, Inc. and Dean R. Shore, Inc. The Government contends that Plaintiff, as an officer, director and largest shareholder of CMS and INCON, is responsible for payment of these taxes and acted with reckless disregard in failing to pay federal taxes.
Wilma Shore filed her opposition to the United States' summary judgment motion on August 14, 2009. (Doc. 74.) In support of her opposition, Plaintiff submitted: (1) a Memorandum opposing the motion ("Memorandum"); (2) the declaration of Art Myatt; (3) the declaration of Dennis Bean, PhD; (4) the declaration of ...