Hartman v. U.S.

• Decision Date: 30 July 1976
• Docket Number: No. 75-1698,75-1698
• Citation: 538 F.2d 1336
• Parties: 76-2 USTC P 9578 George D. HARTMAN, Jr., Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1336

538 F.2d 1336

76-2 USTC P 9578

George D. HARTMAN, Jr., Appellant, v. UNITED STATES of America, Appellee.

No. 75-1698.

United States Court of Appeals Eighth Circuit.

Submitted April 14, 1976.

Decided July 30, 1976.

Anthony J. Sestric, St. Louis, Mo., for appellant.

William M. Brown, Jr., Atty. Tax Div., Dept. of Justice, Washington, D. C., for appellee; Donald J. Stohr (former U. S. Atty.; effective May 15th, Barry A. Short, U. S. Atty.), St. Louis, Mo., Scott P. Crampton, Asst. Atty. Gen., Gilbert E. Andrews and Michael L. Paup, Attys., Tax Div., Dept. of Justice, Washington, D. C., on brief.

Before GIBSON, Chief Judge, HENLEY, Circuit Judge, and MEREDITH, Chief District Judge. ^*

HENLEY, Circuit Judge.

This is a federal tax refund case in which George D. Hartman, Jr., plaintiff below, appeals from a judgment of the United States District Court for the Eastern District of Missouri. ¹

The litigation arises from the fact that with respect to the first two calendar quarters of 1970 Archway Erection Company (Archway), a Missouri corporation, failed to account for and pay over to the government sums withheld from the wages of employees as required by the Federal Insurance Contributions Act, 26 U.S.C. §§ 3101 et seq. and by the federal income tax laws. ² The withholdings of Archway for the first two quarters of 1970 amounted to approximately $31,000.00. Returns for both quarters were filed belatedly, but the withholdings due the government were not paid. Archway ceased to do business in the late summer or fall of 1970. Subsequently, the government was able to levy upon certain accounts receivable and corporate assets, and the proceeds of the levy and sale were applied to withholdings attributable to the third quarter of 1970 which had not been paid over.

From the date of the incorporation of Archway in 1966 plaintiff was its president and treasurer and held 20% of its capital stock. M. A. Steinback, who is not involved in the litigation, was the company's vice president and secretary, and he owned 20% of the stock of the company. The majority of the stock, 60%, was owned by J. I. Tipton, but for a reason that will be stated Tipton was not a corporate officer or a member of the corporation's board of directors. ³

As to the quarters in question, the Commissioner of Internal Revenue, acting, of course, through subordinate officials of the Internal Revenue Service, assessed against plaintiff and Tipton personally the 100% penalty prescribed by 26 U.S.C. § 6672. ⁴

Plaintiff made a token payment with respect to each of the two quarters and filed a timely claim for refund. ⁵ No action having been taken on that claim within six months, plaintiff commenced this action in the district court on May 3, 1974. The government denied that plaintiff was entitled to a refund of the token payments and filed a counterclaim to recover the unpaid balance of the assessment.

Subsequently, the government, as authorized by Fed.R.Civ.P. 13(h), filed an additional counterclaim against Tipton. Tipton entered no appearance, and the government moved for a default judgment against him. That motion was granted and default judgment against Tipton was entered on the first day of the trial of the issues between plaintiff and the government.

In the course of the trial, which was before a jury, both sides moved at appropriate times for a directed verdict on which motions ruling was reserved. The case went to the jury, and the jury found the issues in favor of the government. Plaintiff moved for judgment notwithstanding the verdict, or, alternatively, for a new trial. Final judgment was entered on the verdict and this appeal followed.

For reversal, plaintiff contends principally that the case should not have gone to the jury, and that the district court erred in overruling his motion for judgment notwithstanding the verdict. Plaintiff also complains of alleged errors committed in the course of the trial, and on the basis of those asserted errors he contends that he is at least entitled to a new trial.

I.

As heretofore noted, employers are required to withhold from the wages of employees contributions owed by them under the Federal Insurance Contributions Act and federal income taxes, to periodically account for the withholdings, and to pay them over to the government. 26 U.S.C. § 7501 provides that withholdings from employee wages constitute a trust fund in favor of the government. When wages are withheld from an employee by an employer, his tax liabilities are credited with the withholdings, and it makes no difference to him whether the employer ever settles with the government. Kelly v. Lethert, 362 F.2d 629, 632-33 (8th Cir. 1966).

Thus, if an employer does not pay over the withholdings to the government, and if the government cannot collect the amount of withholdings from the employer or from some other source, the withheld taxes are simply lost to the government. Kelly v. Lethert, supra; see also the leading case of Bloom v. United States, 272 F.2d 215 (9th Cir. 1959), cert. denied, 363 U.S. 803, 80 S.Ct. 1236, 4 L.Ed.2d 1146 (1960).

The great majority of employers faithfully account for and pay over the taxes withheld from employees. Not infrequently, however, and particularly when the business of the employer is in a precarious financial position or when it is short of cash funds, an employer will not pay over the withheld funds and will use them for working capital or to pay other creditors, often in the hope that better times will come and that the withholdings can eventually be paid over along with interest and an ordinary civil penalty for delinquency in payment. As will be seen, that happened in this case.

If a corporate employer defaults with respect to sums withheld by it, a corporate officer or employee may be liable personally for the penalty prescribed by § 6672, which is generally called the "100% penalty," if during the period involved he was a "responsible person" under § 6671(b), and if he acted "willfully" in respect of the tax liability of the employer.

While § 6672's imposition is called a "penalty," it is well established that it is not a penalty in any criminal sense of the term. It is civil in nature and is merely a means whereby the government can collect from a corporate officer or employee the taxes that the corporate employer withheld and should have accounted for and paid over. Kalb v. United States, 505 F.2d 506 (2d Cir. 1974), cert. denied, 421 U.S. 979, 95 S.Ct. 1981, 44 L.Ed.2d 471 (1975); Monday v. United States, 421 F.2d 1210 (7th Cir.), cert. denied, 400 U.S. 821, 91 S.Ct. 38, 27 L.Ed.2d 48 (1970); Kelly v. Lethert, supra; United States v. Strebler, 313 F.2d 402 (8th Cir. 1963); Bloom v. United States, supra.

There are two things that should perhaps be said about a § 6672 assessment. First, while the assessment will never be made if the employer pays over the withholdings, the assessment, if it is made, imposes a direct and personal, as opposed to a vicarious, liability on the person who is assessed. Kelly v. Lether, supra, 362 F.2d at 632. Second, while two or more persons may be jointly and severally liable under § 6672, the government is not entitled to more than one satisfaction of the tax liability owed to it. Ibid. at 635.

In United States v. Hill, 368 F.2d 617, 621 (5th Cir. 1966), the elements of a § 6672 liability were set out substantially as follows: (1) There must be a person. (2) He must have been required to collect, truthfully account for, and pay over taxes. (3) He must willfully fail to collect or willfully fail to truthfully account for and pay over the taxes in question.

The first two elements of the statutory liability are encompassed in the concept of a "responsible person," a term that frequently appears in the cases and that counsel on both sides have used in this case.

Where corporate withholdings are involved, a responsible person is normally a managing officer or employee of the corporation, but he need not be such an officer or employee, and there may be more than one responsible person. A corporate officer or employee is responsible in present context if he has significant, albeit not necessarily exclusive, authority in the field of corporate decisionmaking and action where taxes due the federal government are concerned; but he need not be an actual disbursing officer. See Haffa v. United States, 516 F.2d 931 (7th Cir. 1975); Adams v. United States, 504 F.2d 73 (7th Cir. 1974); Monday v. United States, supra; United States v. Hill, supra; Scott v. United States, 354 F.2d 292, 173 Ct.Cl. 650 (1965); Kelly v. Lethert, supra; United States v. Strebler, supra; Bloom v. United States, supra.

In order for a responsible person to be liable under § 6672, his act or omission must be willful. That does not mean, however, that the person must act with evil or fraudulent intent, and many persons who have been held liable under the statute have not so acted. It is sufficient if the person acts or fails to act consciously and voluntarily and with knowledge or intent that as a result of his action or inaction trust funds belonging to the government will not be paid over but will be used for other purposes. Kalb v. United States, supra; Harrington v. United States, 504 F.2d 1306 (1st Cir. 1974); Burden v. United States, 486 F.2d 302 (10th Cir. 1973), cert. denied, 416 U.S. 904, 94 S.Ct. 1608, 40 L.Ed.2d 109 (1974); Dudley v. United States, 428 F.2d 1196 (9th Cir. 1970); Monday v. United States, supra; United States v. Strebler, supra; Bloom v. United States, supra.

In Kalb v. United States, supra, 505 F.2d at 511, the court after rejecting an argument of the government that a corporate officer acts willfully "(if) he should have known that taxes owed were not paid," had this to say:

. . . Conduct amounting to no more than negligence is not willful for purposes of § 6672. Dudley v. United States, 428 F.2d 1196, 1200 (9th Cir. 1970). It is, however, not necessary...