BOARD MEMBERS WERE RESPONSIBLE PERSONS FOR SOME QUARTERS.

[1] B.G. Enterprises, Inc. ("B.G.") failed to pay withheld income and Federal Insurance Contributions Act ("FICA") taxes for the tax periods ending December 31, 1995; March 31, 1996; June 30, 1996; September 30, 1996; and December 31, 1996.

[2] The government asserts that plaintiff Cecil J. Moulton and defendants William Glick and Gregory Pratt, shareholders and officers of B.G., are responsible persons for these tax periods under 26 U.S.C. § 6672.¹ Moulton and Pratt deny liability, pointing the finger at Glick as the only liable party. Glick has defaulted.

[3] After a bench trial on November 10 and 13, 2003, I hold that Moulton and Pratt are the responsible persons for the tax period ending December 31, 1996, and order entry of judgment in favor of the defendant and counterclaim plaintiff United States of America. I make the following findings of fact and conclusions of law.

[5] The genesis of Spectrum is unexceptional. Cecil Moulton, the owner of CJM & Associates, an accounting firm, had been Glick's accountant. Glick asked Moulton to invest in Spectrum, and Moulton, in turn, asked two other clients, Jespersen, a sophisticated businessman, and Pratt, the head of an executive recruiting firm, if they wanted an investment opportunity. Moulton agreed to be the Treasurer and Secretary of the company. Initially Glick was Chair, but he was replaced by Pratt on November 18, 1994; Pratt continued in that position through March 23, 1997. The Board of Directors from January 1994 through November 1996 was made up of Pratt (33.8% equity ownership); Glick (29.9%); Moulton (14.9%); Marshall Jespersen (12.3%); and Edward Dalton (9.1%). The Board of Directors was proactive, meeting every month for two hours to review financial operations from September 1994 to January 1997. However, they rarely visited the company.

[6] Moulton's accounting firm provided accounting and bookkeeping services for B.G. (including the preparation of tax forms) and was reimbursed on a monthly basis (until the end). As Treasurer, Moulton presented the financials to the Board at every meeting, and was responsible for proposing B.G.'s operating budget. Under the bylaws, he also was responsible for the corporation's funds. (Ex. 173, §4.9)

[7] In June 1994, Glick had a heart attack, and Moulton assumed control of many of the daily operations, including check- writing for the payroll and insurance. Before then, Moulton did not have check-writing authority. After Glick returned from his medical treatment, Moulton retained the check-writing authority at the Centerpoint Bank until August 12, 1997. However, he only exercised that authority during Glick's sick leave. During this period, Pratt assumed the title of Vice President, although he did not actually exercise this executive power after Glick's return. At this time he had signing authority at Centerpoint as well. During the summer of 1994, Moulton exercised actual financial control over Spectrum -- but at that point it was current with its tax obligations.

[8] At least beginning in 1995, B.G. had difficulty meeting its federal tax liabilities. It met with an IRS representative and negotiated a payment schedule with which it complied through October 1995. In February 1995, the Board instituted the voucher system to rein in the undisciplined spending of Glick. Glick was supposed to submit vouchers to Moulton and receive approvals for expenditures before they were made. The voucher system failed because Glick refused to comply. It was abandoned within a month. Moulton approved only one voucher. By October 1995, B.G. failed to meet its IRS payroll tax limitations, even under the negotiated plan.

[9] In 1995, the company began a downward tailspin, accumulating large debts to suppliers and other creditors. The Board of Directors, painfully aware of the unpaid FICA taxes owed to the IRS, on a monthly basis instructed Glick to pay the liabilities. Glick ignored these instructions month after month and continued to prefer suppliers and the landlord to the IRS. However, he complied with some of the Board's instructions. When the Board instructed Glick to reduce health benefits for employees, he complied with this instruction. The Board authorized the hiring of a part-time accounting person in July, 1995. The Board also voted to create preferred classes of company stock to ensure a greater claim on company assets for Board members. Although the Board had the power to fire Glick, it chose not to do so because he was the only one who had the scientific know-how to keep the company afloat: termination of Glick would have been the death knell of the company.

[10] Frustrated by Glick's intransigence and the business woes of Spectrum, in the last quarter of 1996, the Board finally took control of the company on a day-to-day basis. In July 1996, it authorized the hiring of two employees and permitted Glick to go to trade shows, and declined to give Glick a bonus. In November 1996, it denied Glick's son's request for vacation time. As debts from creditors kept mounting, the Board hired Stephen Hudson at $70,000 a year to serve as the Chief Operating Officer with check-writing authority over the operating account at Fleet. The Board had the authority to direct the actions of Stephen Hudson. After finding one unpaid bill from the IRS in November 1996, Hudson paid it, invoking Glick's ire. Moulton signed Forms 941 in two of the quarters at issue in this case: quarters ending 9/30/96 and 12/31/96. He also requested and received $5,000 owed to CJM although it is not clear when. In the last quarter of 1996, from about December 3, 1996 through April 1997, Pratt had check signing authority over the operations account. Glick gave the Board the ultimatum that his sole authority over the checkbook be restored, or he would leave. Meekly, the Board terminated Hudson's service after two months, although he remained as a consultant. The Board's strategy focused on finding a buyer for the company -- the loss of Glick would make a sale impossible. With an eye to saving their investments, Moulton and Pratt chose to gamble with the taxpayers' payroll funds in the hope that finding a buyer would be possible. Meanwhile CJM was not getting paid the $9,600 owed for its bookkeeping services, the Bank was not getting paid on its line of credit, and the IRS was not getting paid the withheld taxes. Glick resigned on December 2, then returned and resigned for good on December 30, 1996.

[11] Back on June 23, 1994, Pratt had co-signed a $100,000 business loan agreement in order to establish a corporate line of credit on behalf of B.G. at Centerpoint Bank, and used his own certificate of deposit as a guarantee. In 1996-1997 Pratt paid the bank when the loan went into default, and was assigned the bank's lien on B.G.'s assets. On March 23, 1997, B.G. sold the assets for $70,000, and Pratt repaid himself from the Fleet account for the value of the loan to B.G. The IRS was not paid a dime from the sale of B.G.'s assets.

[12] By the last period of 1996, the Board of Directors possessed actual, exercised authority over the company's financial matters, including the power to determine which creditors to pay. The Board had the power to switch check-writing authority to another person, which it actually exercised when it authorized Hudson to sign checks. It had the power to hire employees (it approved two hirings in 1996) and reduce employee benefits. It had the power to instruct Glick to pay the IRS, and when he failed to do so, to terminate his employment. In 1996, it approved proposals to pay back loans made by shareholders to Spectrum. Pratt exercised his authority to give his loan priority over the IRS liability when the assets were sold. Jespersen wanted to close the company down earlier and Dalton was no friend of Glick. Therefore, there were sufficient votes on the Board to pay the IRS. However, Moulton and Pratt balked, preferring to protect their investment by seeking a seller rather than terminating Glick and seeing the assets paid to the IRS. While Moulton and Pratt complained that Glick, their delegee, contravened their orders to give the IRS priority over the creditors, at least by the end of 1996, their failure over many months to sanction him constitutes a ratification of his conduct. Although there was no intent to defraud, Pratt and Moulton willfully failed to pay the IRS when they assumed control at the end of 1996.

[13] On December 6, 1999, the government made an assessment against Cecil Moulton of a 100 percent penalty in the amount of $23,093.94, pursuant to 26 U.S.C. § 6672, by reason of his alleged willful failure to collect, truthfully account for, and pay over income and FICA taxes withheld from the wages of the employees of B.G., for the period ending December 31, 1996, including the first, second, third, and fourth quarters of 1996. After receiving timely notice and demand, Moulton refused to pay the liabilities assessed against him, in the amount of $20,485.94, plus statutory interest from the date of assessment. He contests liability.

[14] On September 27, 1999, the government made an assessment against Pratt of a 100 percent penalty in the amount of $6,428.30, pursuant to 26 U.S.C. § 6672, by reason of his alleged willful failure to collect, truthfully account for, and pay over withheld income and FICA taxes withheld from the wages of the employees of B.G. for the period ending December 31, 1995. On November 22, 1999, it assessed a 100 percent penalty in the amount of $23,093.94, pursuant to 26 U.S.C. § 6672, by reason of Pratt's alleged willful failure to collect, truthfully account for, and pay over withheld income and FICA taxes withheld from the wages of the employees of B.G. for the period ending December 31, 1996, including the first, second, third, and fourth quarters of 1996.

[16] To determine that a person is responsible under section 6672, a court must find that he "possessed actual, exercised authority over the company's financial matters, including the duty and power to determine which creditors to pay." Vinick v. United States, 205 F. 3d 1, 15 (1st Cir. 2000). Factors that indicate control over the financial affairs of a corporation include such things as holding a position as officer or member of the board of directors, owning shares of stock in the company, acting in the management of day-to-day affairs, possessing the ability to hire and fire employees, making decisions regarding when and in what order outstanding debts or taxes will be paid, exercising control over the bank accounts and disbursement records, and having check signing authority. Id. at 7. A determination of responsibility is made in light of the totality of the circumstances; no one factor is determinative. Id. at 8. The term "responsible" is given a broad interpretation. Caterino v. United States, 794 F.2d 1, 5-6 (1st Cir. 1986), cert. denied, 480 U.S. 905 (1987). In light of this broad interpretation, a person cannot absolve himself by claiming that he delegated responsibility to someone else, or that he put misplaced trust in another person. Thomsen v. United States, 887 F.2d 12, 17 (1st Cir. 1989).

[17] The term "willfully," as it is used here, means simply a voluntary, conscious and intentional decision to prefer other creditors over the United States. It does not require any bad motive, such as an intent to defraud or deprive the United States of taxes. Vinick v. Comm'r, 110 F.3d 168, 173 (1st Cir. 1997). A responsible person acts "willfully" if he knew or should have known that the trust fund taxes were not being paid and that company funds were used to pay creditors other than the United States. Caterino, 794 F.2d at 6; Harrington v. United States, 504 F.2d 1306, 1313 (1st Cir. 1974). Moulton and Glick have stipulated that if they were responsible persons, their intent was willful.

[18] Under these standards, I conclude that Moulton and Pratt exercised significant control over the financial affairs of B.G. in the fourth quarter of 1996, and are responsible persons under the totality of the circumstances for that quarter. They willfully failed to collect, truthfully account for, and pay over the withheld income and FICA taxes of B.G. for the period ending December 31, 1996.

[19] With respect to the earlier quarters, the evidence does not support the government's claim that they were engaged in day- to-day management. Occasional involvement in business affairs is insufficient to create liability. Vinick, 205 F.3d at 20. While Pratt and Moulton had check-writing authority in the summer of 1994 and Moulton in February 1995, no taxes were overdue in those quarters. See Vinick v. Comm'r, 110 F.3d at 172 (focusing attention on the relevant quarters and noting that while Vinick participated in some business activities, "neither of those incidents occurred during the quarters in question").

[20] There is some evidence of an increasing role in financial management in the third quarter, but the evidence does not persuade me Pratt and Moulton could have paid the taxes at that time. There is scant to no evidence of actual exercise of control in 1995 or the first two tax periods of 1996.