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Gretta M. Bernabe v. United States of America


December 19, 2011


The opinion of the court was delivered by: Dean D. Pregerson United States District Judge



Defendant and Counterclaim-Plaintiff United States of America ("Defendant") brings this Motion for Summary Judgment ("Motion") against Plaintiff and Counterclaim-Defendant Gretta M. Bernabe ("Gretta Bernabe"). Having reviewed the parties' moving papers and heard oral argument, the court grants the Motion and adopts the following Order.


There are no genuine disputes as to the following facts. Pleasant Care Corporation and its four related subsidiaries ("Pleasant Care") operated approximately thirty skilled nursing facilities and residential care facilities, and had approximately 3,000 employees. During the 2006 and 2007 payroll tax periods at issue, Pleasant Care failed to pay to the Internal Revenue Service ("IRS") all of the federal income and social security taxes it had withheld from its employees' wages (collectively, "payroll" or "trust fund" taxes).*fn1 (Opp'n at 2.) Emmanuel Bernabe was the President of Pleasant Care. Pleasant Care also had an Executive Vice President, a Vice President of Finance, and a Compliance Officer. Gretta Bernabe was Pleasant Care's Secretary and Treasurer. (Id. at 3.)

Gretta Bernabe's salary was $86,847 in 2006 and $97,087 in 2007. As part of her duties, Gretta Bernabe reviewed batches of checks prepared by Accounts Payable and usually signed by the Vice President of Finance. The checks were grouped by expense priority. Before August 2006, the first priority was payroll, including payroll taxes. In August 2006, Emmanuel Bernabe verbally instructed Gretta Bernabe that payroll taxes were no longer first priority. (Mot. at 3-4.*fn2 ) Pleasant Care's relevant checking account required two signatures from the three authorized signatories - Emmanuel Bernabe, Gretta Bernabe, and the Vice President of Finance. Gretta Bernabe typically reviewed the check amounts and priorities, then provided the second signature. (Id. at 4-5.) Gretta Bernabe also had a signature stamp for Emmanuel Bernabe, which she sometimes used. During the periods at issue, Emmanuel Bernabe only reviewed a small portion of the checks signed and stamped by Gretta Bernabe. Gretta Bernabe signed approximately 200 checks per day, and signed and stamped at least one check for more than $10,000. (Id. at 5-6.) She also signed checks paying creditors other than the United States, knowing that the payroll taxes had not been paid. (Id. at 9.)

Gretta Bernabe's duties also included transferring funds from Pleasant Care's general account to its payroll account, to ensure there were sufficient funds to cover payroll. In addition, she prepared and signed Pleasant Care's quarterly federal tax returns, and had some involvement in the hiring and firing of employees. (Id. at 7-8.)

On the other hand, viewing the evidence in the light most favorable to Gretta Bernabe, Emmanuel Bernabe made the major financial and management decisions for Pleasant Care, and had the final say on all decisions. (Opp'n at 5-7.) Emmanuel Bernabe also assured Gretta Bernabe, who wanted to pay the payroll taxes, that he had a plan to sell certain facilities so they could do so. (Id. at 9-10.) Further, Emmanuel Bernabe was a dominating individual who yelled at Gretta Bernabe. (Id. at 10-11.) Gretta Bernabe also alleges that Emmanuel Bernabe required her to follow his specific creditor payment instructions at all times, and that her official job title therefore overstates her actual authority. (Id. at 7-9.)

On September 30, 2009, the IRS sent notice of intent to assess against Gretta Bernabe the trust fund recovery penalty ("TFRP") provided by 26 U.S.C. § 6672 ("Section 6672"). On October 13, 2009, the IRS assessed the TFRP against Gretta Bernabe. (Mot. at 9.) After meeting the relevant procedural requirements, Gretta Bernabe filed this action against Defendant on March 4, 2010, alleging that the TFRP assessment was improper. (Compl. ¶¶ 10-17.)

Defendant now seeks summary judgment that Gretta Bernabe is liable for the TFRP under Section 6672. Defendant argues that it is entitled to summary judgment because the undisputed facts demonstrate that Gretta Bernabe was 1) a "responsible person," who 2) willfully failed to pay the required payroll taxes. Gretta Bernabe contends, to the contrary, that there are genuine issues of material fact as to these two elements.


Summary judgment is appropriate where "the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(a). Material facts are those "that might affect the outcome of the suit under the governing law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A genuine issue of fact exists if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Id. The evidence must be viewed in the light most favorable to the nonmoving party, with all justifiable inferences drawn in its favor. Id. at 255.

It is not enough, however, for the nonmoving party to rest on the "mere allegations or denials of his pleadings." Id. at 259. Instead, the nonmoving party must go beyond the pleadings to designate specific facts showing that there is a genuine issue for trial. Celotex Corp. v. Catrett, 477 U.S. 317, 324 (1986). The "mere existence of a scintilla of evidence" in support of the nonmoving party's claim is insufficient to defeat summary judgment. Anderson, 477 U.S. at 252.

In a TFRP case, "the government bears the initial burden of proof." Oliver v. United States, 921 F.2d 916, 919 (9th Cir. 1990). The government may normally satisfy this burden "by introducing into evidence its assessment of taxes due." Id. "[T]he taxpayer then has the burden of proof with respect to both his own claim and the government's counterclaim." Id. Here, there is no dispute that the government satisfied its initial burden by introducing its relevant tax assessments into evidence. (Mot. at 10-11.) Gretta Bernabe therefore bears the ultimate burden of proving that she does not meet at least one of the two TFRP elements under Section 6672.


The Internal Revenue Code requires employers to withhold federal social security and individual income taxes from their employees' wages. Davis v. United States, 961 F.2d 867, 869 (citing 26 U.S.C. §§ 3102(a) and 3402(a)). Employers collect these tax amounts each salary period, but pay them to the IRS on a quarterly basis. In the interim, the employer holds the collected taxes in trust for the United States. Davis, 961 F.2d at 869. If an employer ultimately fails to pay over the collected taxes, the government still credits the employees with the payment. Accordingly, to protect against revenue losses, the tax code provides the United States a variety of ways to recover the taxes from the employer. Id. (citing Slodov v. United States, 436 U.S. 238, 243 (1978), and 26 U.S.C. §§ 6321, 6672, 7202, and 7215).

Section 6672, in particular, authorizes the government to hold "responsible persons," such as corporate officers, personally liable for a civil penalty equal to the amount of the delinquent trust fund taxes - i.e. the trust fund recovery penalty. See Davis, 961 F.2d at 869-70. Under Section 6672, a responsible person is anyone "required to collect, truthfully account for, and pay over" the trust fund taxes. Such a person is liable for the TFRP if they willfully fail to comply with these duties.

The courts have further elaborated on these two elements. In the Ninth Circuit, "responsibility is a matter of status, duty, and authority." Purcell v. United States, 1 F.3d 932, 937 (9th Cir. 1993) (internal quotation marks omitted). An individual is therefore a responsible person if she "had the authority required to exercise significant control over the corporation's financial affairs, regardless of whether [she] exercised such control in fact." Id. Moreover, "[i]nstructions from a superior not to pay taxes do not . . . take a person otherwise responsible under section 6672(a) out of that category." Id. (quoting Brounstein v. United States, 979 F.2d 952, 955 (3rd Cir. 1992)).

The Ninth Circuit has also considered various factors, none of which is alone determinative, in deciding responsible person status. An individual is more likely to be found responsible if he or she: 1) holds corporate office; 2) has check-signing authority; 3) can hire and fire employees; 4) manages the day-to-day operations of the business; 5) prepares payroll tax returns; 6) signs financing contracts; and 7) determines financial policy. See United States v. Jones, 33 F.3d 1137, 1141 (9th Cir. 1994); Jordan v. United States, 359 F. App'x 881, 882 (9th Cir. 2002).

"Willfulness," for purposes of Section 6672, means only "a voluntary, conscious and intentional act to prefer other creditors over the United States." Buffalow v. United States, 109 F.3d 570, 573 (9th Cir. 1997) (internal quotation marks omitted). If a responsible person knows that payroll taxes are delinquent, and uses corporate funds to pay other expenses, the failure to pay the taxes is willful. See id.

Here, contrary to Gretta Bernabe's arguments, there is no genuine dispute whether she is a responsible person. Applying the aforementioned factors: Gretta Bernabe was a high-ranking officer of a large corporation with multiple subsidiaries. She was one of three officers with authority to sign corporate checks, and she did in fact sign hundreds of checks per day during the relevant tax periods, including checks for many thousands of dollars. Gretta Bernabe also had at least some involvement and input in hiring and firing employees. Further, while two signatures were required to endorse a check, she had and sometimes used a stamp for the President's signature - thereby endorsing checks without any other approval. Gretta Bernabe was also involved in important day-to-day financial operations, such as reviewing batches of checks for amounts and expense priority, transferring sufficient funds to payroll, and preparing and signing quarterly federal tax returns. For all these reasons, she was clearly a responsible person, with significant control over Pleasant Care's financial affairs.

It is true that, viewing the evidence in Gretta Bernabe's favor, Emmanuel Bernabe made the major business decisions and had the final say on all decisions. Most relevant here, he required Gretta Bernabe to change the priority status of payroll taxes. But under Ninth Circuit precedent, following orders does not protect an otherwise responsible person from Section 6672 liability.*fn3 Here, as discussed, all of the evidence establishes that Gretta Bernabe was a responsible person. Therefore, that she was following Emmanuel Bernabe's instruction with regard to payroll tax priority is immaterial. Indeed, the undisputed facts establish that Gretta Bernabe exercised substantial financial authority outside of Emmanuel Bernabe's control, as he did not review the majority of the checks that she authorized.

Finally, as to willfulness, there is no dispute that Gretta Bernabe signed checks paying creditors other than the United States, knowing that the payroll taxes had not been paid. Under Ninth Circuit precedent, it is irrelevant that Gretta Bernabe allegedly wanted to pay the taxes, was verbally abused by Emmanuel Bernabe, and was reassured by him that the taxes would be paid. As the Buffalow court explained, addressing a similarly sympathetic situation, neither motive nor reliance can excuse a knowing failure to pay trust fund taxes. 109 F.3d at 573-74. Here, Gretta Bernabe knew that Pleasant Care's payroll taxes were delinquent, yet paid other creditors. She therefore willfully failed to pay the taxes.


For all these reasons, the court grants Defendant's Motion for Summary Judgment.


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