Bell v. U.S.

• Decision Date: 07 January 2004
• Docket Number: No. 02-3295.,02-3295.
• Citation: 355 F.3d 387
• Parties: Roxanne BELL, Plaintiff-Appellant, v. UNITED STATES of America, Respondent-Appellee.
• Court: U.S. Court of Appeals — Sixth Circuit

355 F.3d 387

Roxanne BELL, Plaintiff-Appellant, v. UNITED STATES of America, Respondent-Appellee.

No. 02-3295.

United States Court of Appeals, Sixth Circuit.

Argued: July 31, 2003.

Decided and Filed: January 7, 2004.

Appeal from the United States District Court for the Northern District of Ohio, Patricia A. Hemann, United States Magistrate Judge.

David G. Umbaugh (argued and briefed), Umbaugh & Sharp, Hudson, OH, for Appellant.

Karen D. Utiger (argued and briefed), Teresa E. McLaughlin (briefed), United States Department of Justice, Washington, DC, Annette G. Butler (briefed), Assistant United States Attorney, Cleveland, OH, for Appellee.

Before DAUGHTREY, MOORE, and SUTTON, Circuit Judges.

OPINION

MOORE, Circuit Judge.

Many employers are required to withhold various taxes from the wages of their employees, which the employers hold in trust until the taxes are paid over to the federal government. Failure to forward these "trust fund" taxes to the government violates § 6672(a) of the Internal Revenue Code ("Code"), 26 U.S.C. § 6672(a). This case involves a determination of what constitutes a willful failure to pay those taxes. Plaintiff-Appellant Roxanne Bell brought an action against the Internal Revenue Service ("IRS") claiming a refund for $58,902.24 that was paid to satisfy an assessment made against the late Willard R. Bell ("Bell"). She claimed that Bell did not willfully fail to pay trust fund taxes, because his company's relationship with its lending institution deprived him of control over his company's funds such that he could not pay the taxes. The district court granted the government's motion for summary judgment. We AFFIRM because Bell's voluntary commencement of a contractual relationship with a bank that limited but did not deprive him of his ability to pay the trust fund taxes and Bell's repeated payments to creditors other than the federal government constituted a willful failure under § 6672(a).

I. BACKGROUND

Bell's difficulties with the IRS trace back to July 1990, when Bell purchased Dyac Corporation, a floundering company that manufactured industrial fasteners and shell casings for munitions. It is not disputed that Bell was the largest stockholder (51.5% of shares) and chief operating officer of Dyac, nor is it disclaimed that Bell essentially ran the company on a day-to-day basis. Like any other business, Dyac was responsible for withholding federal wage, Federal Insurance Contribution Act ("FICA"), and Medicare taxes from employees' wages and keeping them in "trust" until it remitted them to the federal government on a quarterly basis. Dyac sufficiently met its trust fund tax obligations through the fourth quarter of 1991.

Dyac was struggling financially at and following its acquisition by Bell. Bank One, which had served as a lender to Bell during the acquisition process, provided Dyac with a revolving line of credit secured by security interests in Dyac's assets. As a consequence of financial problems throughout 1991, Bank One and Dyac amended their loan agreement several times. On September 30, 1991, Bank One and Dyac signed the "Fourth Amendment to the Credit and Security Agreement," which provided for the commencement of a lock-box arrangement. Bell and Dyac would place all cash receipts into the lock-box, which reduced Dyac's mounting indebtedness to Bank One. Then, Bank One would release additional loan advances into one or more of Dyac's three accounts with the Bank (a general operating account, a payroll account, and a trust fund account). In order to obtain these advances, Dyac had to submit a "borrowing certificate" to Bank One on a weekly and sometimes daily basis.

The issue of who controlled Dyac's funds is paramount. Bank One did not actually pay any of Dyac's bills under this arrangement; the Bank released the funds to Dyac's accounts, and Bell, as the chief operating officer, disbursed the money without further bank supervision. The Bank did control how much money flowed into Dyac's bank accounts, but the Bank did not actually control the company's financial outlays. Bell alleged in a deposition that Bank One had considerable authority over Dyac's accounts. He contended that Bank One often would refuse to advance funds until Dyac submitted a list of payees and Bank One would then edit the list so as to disallow certain payments. Bell also claimed that Bank One "stepped over the line ... exercising complete control over which obligations would be paid." Joint Appendix ("J.A.") at 307 (Bell Statement, Apr. 3, 1996). Bank One, however, disclaims this recounting of its relationship with Dyac.

Dyac's financial woes did not cease, and by January 1992, Dyac had overextended its credit with Bank One. On January 22, 1992, Dyac and Bank One entered into a Forbearance Agreement, which permitted Dyac to keep its doors open. The Forbearance Agreement perpetuated the lock-box arrangement, reduced the loan-advance ceiling, and explicitly addressed the payment of trust fund payroll taxes:

The Borrower agrees that the first Revolving Loans available to it hereunder as of the date ... hereof ... and thereafter as may be necessary ... shall be set aside and reserved for the payment of that week's projected payroll and "trust fund" payroll taxes, as the same are set forth on the Budget; and the Borrower hereby instructs the Bank without further instruction or request from the Borrower, to advance such Revolving Loans as deposits into the Borrower's payroll account maintained at the Bank and hereby further agrees that such sums shall be drawn upon solely for such purposes.

J.A. at 99 (Forbearance Agreement). At some point after December 1991, Bank One stopped approving loan advances to cover the payroll trust fund taxes. The timing of Bank One's cessation of trust fund loan advances is in dispute. In a letter/memorandum dated April 3, 1996, Bell claimed that in "mid December [1991]" Bank One "began excluding Payroll Trust Items" from the items approved on the borrowing certificates. J.A. at 306-07 (Bell Mem.). However, a Bank One loan officer noted in a memo requesting approval for the Forbearance Agreement on January 22, 1992, that the Bank would advance $16,500 as part of the agreement, partially to be used for trust fund taxes.

On February 12, 1992, Bank One denied Dyac's request for additional loan advances to pay off Dyac's past trust fund tax obligations. Bell sent Bank One a fax that requested an advance for "past trust fund obligations which the Company has not been able to obtain the release of our funds from the Bank to be able to discharge." J.A. at 280 (Facsimile Dated 02/12/92). The fax specifically mentioned over $51,000 in FICA trust fund taxes that were in arrears for most of January. Gary Sprague ("Sprague"), the Bank One loan officer in charge of the Dyac accounts, denied the request because Bank One had already lent Dyac money for payroll taxes in January and this additional request represented an overadvance that was not covered by the Forbearance Agreement.

During January, February, and the first week of March in 1992, Dyac failed to pay to the IRS any trust fund taxes. Dyac had thus failed to pay six weeks of trust fund taxes in 1992 before the February 12 refusal by Bank One to advance any funds for the past tax debt. Dyac then failed to pay any taxes for the rest of February and March. Yet, Dyac still continued to disburse funds, as it withdrew over $1.37 million from its three bank accounts during that time. Additionally, Dyac continued to pay money to other creditors during the first quarter of 1992, as Thomas Small, the Vice-President of Dyac, stated that Dyac satisfied its obligations to vendors, such as the phone company, the electric company, and several steel suppliers while the delinquent taxes accrued.

Dyac filed for bankruptcy on March 6, 1992. On March 17, 1997, the IRS made an assessment of $58,902.24 against Bell under § 6672 of the Code for the full amount of the unpaid trust fund tax debt from the first quarter of 1992. See 26 U.S.C. § 6672. Bell paid the assessment and requested a refund, which the IRS ultimately denied in September 1997.¹ Following Bell's death, Roxanne Bell brought this refund action on September 3, 1999,² as an individual, as executrix of Bell's Estate, and as Trustee of the Willard R. Bell Living Trust. Upon consent of the parties, the case was transferred to a U.S. Magistrate Judge for disposition. 28 U.S.C. § 636(c)(1). The Government filed a motion for summary judgment, and in response Roxanne Bell conceded that Bell was responsible for paying the trust fund taxes but denied that he willfully failed to pay the taxes. The magistrate judge granted the Government's summary judgment motion, concluding that because Bell used Bank One's loan advances to pay creditors other than the IRS and because Bell knew that the trust fund taxes were not being paid, as evinced by his complaints that he needed to receive additional loans to pay the taxes, he was responsible and willfully had failed to pay the taxes. The court also rejected Roxanne Bell's argument that there was "reasonable cause" for Bell's failure to pay the taxes, such that he should be excused from his liability. The district court had proper jurisdiction over Roxanne Bell's initial claim pursuant to 26 U.S.C. § 1346(a)(1),³ and this court has jurisdiction over her timely appeal pursuant to 28 U.S.C. §§ 636(c)(3), 1291.

II. ANALYSIS

A. Standard of Review

We review de novo the district court's decision to grant summary judgment. Allen v. CSX Transp., Inc., 325 F.3d 768, 771 (6th Cir.2003). Summary judgment is appropriate where "there is no genuine issue as to any material fact and ... the moving party is entitled to a judgment as a matter of law." Fed R. Civ. P. 56(c). The reviewing court must assess the available proof to determine whether there is a genuine factual issue that justifies a trial. See Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475...