Memorandum of Decision Re: Payroll Tax

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In re ZIAD J. AGHA,                                                                                           No. 97-12622                Debtor. ___________________________/
Memorandum of Decision
I. Introduction      In 1981, six men in the construction trade formed a corporation, Paquin Construction, and a partnership, Paquin Land Company. The primary movers were brothers Jack and Peter Paquin, who between them owned just under half of both entities. Debtor Ziad Agha, a carpenter, was given a 13% ownership interest in each.      The idea was that the partnership would act as a developer and hire the corporation to act as contractor on its projects. Since Agha had experience in development, his managerial responsibilities were mainly on behalf of the partnership. Agha was not in any way responsible for the day-to-day financial affairs of the corporation, nor was he a signatory on its bank accounts.      The six men raised the capital necessary to start the businesses by taking out loans secured by their individual homes. The corporation was supposed to make the mortgage payments on these loans.      In 1985, the corporation failed to pay payroll taxes of approximately $77,000.00. Agha had nothing to do with this, and learned of it only after the fact at a meeting of the corporation's shareholders. After this time, Agha continued to draw moderate compensation and the corporation made some payments on the loan secured by his home, but the payroll taxes remained unpaid. The businesses eventually failed. Agha was able to arrange a real estate transaction which paid a portion of the payroll taxes, but a substantial amount was never paid.      On July 11, 1997, Agha filed a Chapter 13 petition. The IRS filed a proof of claim for $99,443.57, based on the unpaid corporate payroll taxes. Agha's objection to this claim is now before the court. II. Discussion      26 USC section 6672 provides that any individual who is required to collect any pay a payroll tax and fails to do so is personally liable for the taxes. However, all corporate officers and shareholders are not automatically liable for unpaid payroll taxes. Slodov v. United States, 436 U.S. 238 (1978). In order to be personally liable, a person must have had the final word on whether a bill should or should not be paid (Maggy v. United States, 560 F.2d 1372, 1374 (9th Cir.1977)), or at least have had significant control over the company (Turner v. United States, 423 F.2d 448, 449 (9th Cir.1970)).      Agha was not a responsible person by any standard. He held a minor ownership interest. He was not involved in the day-to-day financial affairs of the corporation at all, and had only a minimal voice in the overall conduct of the corporation's business. He was not a signatory on the corporate bank accounts. The corporation's failure to pay its taxes was not Agha's fault, nor was payment of the taxes within his control.      One incident argued by the IRS as establishing Agha's liability in fact demonstrates Agha's lack of significant control over corporate finances. When the corporation began having financial problems, it stopped paying Agha's mortgage payments. Agha had to beg, cajole, threaten and insist to Jack Paquin, who was clearly the person in control, and even then Agha was only partially successful in getting his mortgage payments made. Far from establishing Agha's control of the corporation, it showed that he was not in control of the corporation's finances at all. No person with such a lack of control can be liable under section 6672. Godfrey v. United States, 748 F.2d 1566, 1576 (Fed.Cir. 1984).      In addition to being in control, a responsible person is only liable for unpaid corporate taxes if the failure to pay was willful. "The willfulness requirement is met when a responsible officer voluntarily, consciously, and intentionally causes his corporation to pay creditors out of withheld funds while he is aware that such funds are owed to the United States." Maggy, at 1375. Relying on Davis v. United States, 961 F.2d 867 (9th Cir. 1992), the IRS argues that Agha's acts were willful because he accepted money from the corporation after he knew that taxes had not been paid.      It is true that Agha continued to be paid a modest salary and allow the corporation to make a few mortgage payments on his home after he learned that the payroll taxes had not been paid. However, the evidence did not in anyway substantiate the IRS portrait of Agha as an indifferent and willful nonpayer of taxes. Rather, it showed that Agha was at all times trying to do the right thing while at the same time trying to keep a roof over his family's head. Having no control over what debts the corporation paid, Agha was not under a duty to reduce his family to homeless penury by refusing all compensation while taxes remained unpaid. His situation was entirely different from the taxpayer in Davis, who was the corporation's president and major shareholder.      The IRS also seeks to establish liability on Agha's part based on his efforts to get the corporate tax debt paid, after most of the other shareholders had abandoned the sinking ship, through the sale of condominium units. Agha's attempt to pay the IRS, and thereby avoid a claim of personal liability, is not evidence of liability. The IRS seems to make much of the fact that Agha had co-control of the sales and directed that other debts, such as those to the homeowners' association, be paid out of the escrows even though that meant that the IRS could not be paid in full. However, these units did not belong to the corporation. Section 6672 was entirely inapplicable to these sales. III. Conclusion      Agha was a minor equity owner, with no say in the day-to-day financial affairs of the corporation and only minimal say at all in its operations, which were clearly controlled by the Paquin brothers. Even so, Agha acted responsibly and made every effort to see that the payroll taxes were paid once he learned of the failure. In fact, he was able to arrange a transaction which paid a significant portion of the taxes. Agha is not personally liable for the balance.      For the foregoing reasons, the claim of the IRS shall be disallowed. Counsel for Agha shall submit an appropriate form of order.
Dated: June 9, 1998                                                                                        _______________________                                                                                                                        Alan Jaroslovsky                                                                                                                        U.S. Bankruptcy