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United States v. Hartman

United States District Court, E.D. Michigan, Southern Division

August 16, 2017

JON R. HARTMAN, Defendant.


          Hon. Mark A. Goldsmith, Judge

         Plaintiff United States of America brought this action to hold Defendant John R. Hartman personally liable for his company's failure to remit payroll taxes. Following discovery, the Government moved for summary judgment (Dkt. 21). After briefing on the motion was complete, this Court held a hearing on May 4, 2017. For the reasons stated below, the Government's motion is granted.

         I. BACKGROUND

         Hartman was 50% co-owner and Chief Executive Officer (“CEO”) of Spectrum Tool & Design, Inc., while the company operated from April 2001 to October 2005. Pl. Statement of Material Facts (“SMF”) ¶ 1, Pl. Br. at 6. Dan Ott was 50% co-owner and Chief Operating Officer (“COO”) from April 2001 until Hartman laid him off in August 2005. Id. ¶¶ 1, 17. Both Hartman and Ott had authority to handle money for Spectrum, open and close bank accounts in its name, and sign checks. Id. ¶ 3.

         Generally, Hartman signed employees' paychecks, see id. ¶ 5, whereas Ott prepared the payroll tax deposit checks, see Def. SMF ¶ 3, Def. Resp. at 4 (Dkt. 22). Until December 2003, Spectrum used a third-party payroll service provider, ADP, to process its paychecks. Def. SMF ¶ 5. This involved (i) providing the necessary payroll information to ADP (hours worked, hourly rates, etc.); (ii) waiting for ADP to calculate gross payroll, including employment taxes; (iii) furnishing ADP the gross amount of monies due, including taxes; and (iv) receiving unsigned paychecks from ADP, which Hartman would sign and distribute to employees. See Pl. SMF ¶ 5. ADP would remit payroll taxes to the Government. Hartman admitted that he was the one responsible for paying ADP. Id. (citing Hartman Dep. Tr. at 78 (Dkt. 21-2)).

         In December 2003, Spectrum was unable to remit the full amount of gross payroll (including taxes) due to ADP, and ADP terminated the contract. Id. ¶ 6. Notably, Spectrum was able to pay employees their net payroll during this period, meaning that Spectrum was unable to remit the gross payroll due to its inability to remit the payroll tax portion. Id. ¶ 10. Hartman testified that he knew, in December 2003, that Spectrum could not timely pay its payroll taxes, but he testified that he and Ott anticipated that they would be able to pay back the shortfall in January or February 2004. Id. (citing Hartman Dep. Tr. at 114-115). After being dropped by ADP, Spectrum began using an in-house software system for handling payroll, at Ott's behest.

         The Government outlines how Hartman would “juggle” non-tax bills and decide which creditors would be paid timely, versus who could wait. Id. ¶ 8. Hartman maintains that Ott was the sole person entrusted to ensure that Spectrum paid its employment taxes. Id. ¶ 9; see also Def. SMF ¶ 3 (“Mr. Ott prepared the payroll and payroll tax deposit checks.”).

         Notwithstanding the problem with ADP, which was caused by an inability to remit that portion of gross payroll attributable to payroll taxes, Hartman contends that he did not learn that Ott was routinely failing to pay the payroll taxes until July 2004 - at which time he arranged a meeting with the IRS to discuss the shortfalls. Pl. SMF ¶ 11; see also Hartman Dep. Tr. at 92:7-9 (“Q. And [July 2004 was] when you first realized that employment taxes were not being paid? A. That is correct.”). Hartman described independently discovering accounting irregularities in the in-house software; getting “nosy, ” and going through Ott's desk, where he discovered that Ott had not been paying the taxes. See Hartman Dep. Tr. at 91. Up until that point, Hartman claims that Ott “was cutting them [i.e., creating payroll tax checks] regularly, ” leading Hartman to “think [Ott] was paying those.” Id. at 90:22-25.

         At the first meeting with the IRS, Hartman says that the IRS told him to focus on staying current and then “try to get the back ones caught up.” Pl. SMF ¶ 11. Spectrum could not stay current, however, necessitating another meeting with the IRS in October 2004. Id. ¶ 12.[2]

         At the October 2004 meeting, “Mr. Hartman discovered that Mr. Ott had not been keeping up with Spectrum's current taxes.” Def. SMF ¶ 13. Hartman speculated that, although some taxes were paid between July and October 2004, they were applied to the oldest delinquent quarters. See Hartman Dep. Tr. at 131. He also claimed that, during that period, Spectrum's in- house accounting software reflected that the payroll tax checks were being cut. Id. at 135:23-25.[3] Hartman acknowledges that, at that meeting, he signed tax returns (“Form 941”) for quarterly periods ending December 31, 2003 through September 30, 2004. Pl. SMF ¶ 13; see also Forms 941, Ex. B to Pl. Mot (Dkt. 21-3). One more Form 941 - covering the quarter ending December 31, 2004 - also appears in the Government's Exhibit B, but it was signed on January 10, 2005, at a different meeting. Hartman alleges that, notwithstanding his signature, Ott prepared the returns. See Def. SMF ¶ 13 (citing Hartman Dep. Tr. at 150:12-151:5); see also Hartman Dep. Tr. at 157. Hartman claims that he was “just signing papers that had to be signed, ” and that he did not review the returns, understand them, or pay attention. Hartman Dep. Tr. at 160:6-21.

         The Government asserts that “[a]ll five of the employment tax returns for these periods, which were signed by Mr. Hartman, reflected that the taxes had not been paid.” Pl. SMF ¶ 14 (citing Forms 941). In fact, defense counsel objected to a similar proposition made by the Government's counsel at Hartman's deposition, pointing out that the first three tax returns do not report a balance due.

         In January 2005, Spectrum filed for Chapter 11 bankruptcy protection. Pl. SMF ¶ 19. In monthly reports to the trustee, Hartman reported that Spectrum had not paid its post-petition taxes from March through July 2005. Id. ¶ 21; see also Bankruptcy Reports, Ex. D to Pl. Mot. (Dkt. 21-5); Def. SMF ¶ 21 (admitting the Government's assertion in pertinent part).

         Hartman testified that, beginning in March 2005, he began having “weekly conversations” with Ott regarding their “joint decision to pay the employees but not the taxes.” Hartman Dep. Tr. at 132:21-133:25.

         In May 2005, an IRS Revenue Officer interviewed Hartman, which interview was documented on a Form 4180. See Form 4180, Ex. G. to Pl. Mot. (Dkt. 21-8). Hartman signed the Form 4180 acknowledging that he examined the information on the form and that it was true. See also Hartman Dep. Tr. at 144:17-146:18. On the form, Mr. Hartman admitted, among other things, that he “[d]etermine[d] financial policy for the business”; “[d]irect[ed] or authorize[d] the payment of bills”; “[a]uthorize[d] or sign[ed] payroll checks”; and “[a]uthorize[d] or ma[de] Fedearl Tax Deposits.” Form 4180 at 3. He indicated that he did not “[p]repare, review, sign, [or] transmit payroll tax returns.” Id. He admitted that he first became aware of the delinquent taxes in December 2003, and that while the delinquent taxes were increasing, he authorized the payment of certain of Spectrum's other financial obligations, including payroll, utilities, rent, supplies, operating expenses, loan payments, and equipment leases. Id. at 4.[4]

         Hartman laid off Ott in August 2005 for performance issues. Pl. SMF ¶ 17. Hartman testified that, even after he fired Ott, he still used Ott to pay Spectrum's employment taxes. See Hartman Dep. Tr. at 31:25-32:3.

         On October 24, 2005, Harman filed, on behalf of Spectrum, a notice of conversion from Chapter 11 (reorganization) to Chapter 7 (liquidation). See Pl. SMF ¶ 23. Following an investigation, the Government assessed the trust fund liabilities at issue in this case. See id. ¶ 25.


         On a motion for summary judgment, “facts must be viewed in the light most favorable to the nonmoving party only if there is a ‘genuine' dispute as to those facts.” Scott v. Harris, 550 U.S. 372, 380 (2007). “Where the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine issue for trial.” Matsushita Elec. Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

         “If an assessment [under § 6672] is made against a corporate officer, the burden of proof by a preponderance of the evidence is on the officer to show that he was not a responsible person or that he did not act willfully.” Cline v. United States, 997 F.2d 191, 194-195 (6th Cir. 1993) (citing Calderone v. United States, 799 F.2d 254, 258 (6th Cir. 1986) (quoting Sinder v. United States, 655 F.2d 729, 731 (6th Cir. 1981))). It does not matter who brings the suit. See Sinder, 655 F.2d at 731 (“[T]he taxpayer has the burden of showing that he was not a responsible party on both the refund claim and the counterclaim.” (Emphasis added.)). Stated differently, in the context of a § 6672 claim, “the adverse consequences from [a] lack of evidence should [be] borne” by the taxpayer. Id. at 732. This burden differentiates this case from a typical motion for summary judgment, in which the movant must establish an absence of genuine disputes of material fact to prevail (even if the non-movant is silent).

         Nevertheless, if Hartman can produce evidence to show a genuine issue of material fact as to whether he can overcome the presumption that the Government's assessment is correct, this suffices to spare him from summary judgment. See, e.g., Lewis v. United States, 336 F. App'x 535, 538 & n.1 (6th Cir. 2009). In other words, even if the Government fails to definitively prove a necessary element, it will still prevail - unless Hartman creates a fact question using his own evidence. All evidence must still be considered in the light most favorable to the nonmoving party. See Kinnie v. United States, 994 F.2d 279, 282 (6th Cir. 1993).

         III. ...

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