Mazo v. U.S.

• Citation: 591 F.2d 1151
• Decision Date: 23 March 1979
• Docket Number: No. 77-2104,77-2104
• Parties: 79-1 USTC P 9284 Irwin MAZO, Marvin I. Rosenzweig, Erwin A. Friedman and Barney L. Sadler, Plaintiffs, v. UNITED STATES of America, Defendant-Appellee, v. Marvin I. ROSENZWEIG, Erwin A. Friedman, Barney L. Sadler, William Lattimore, Norman W. Fries, George Moore, and Irwin Mazo, Defendants-Appellants.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

Page 1151

591 F.2d 1151

79-1 USTC P 9284

Irwin MAZO, Marvin I. Rosenzweig, Erwin A. Friedman and Barney L. Sadler, Plaintiffs, v. UNITED STATES of America, Defendant-Appellee, v. Marvin I. ROSENZWEIG, Erwin A. Friedman, Barney L. Sadler, William Lattimore, Norman W. Fries, George Moore, and Irwin Mazo, Defendants-Appellants.

No. 77-2104.

United States Court of Appeals, Fifth Circuit.

March 23, 1979.

Fred S. Clark, Savannah, Ga., for Norman Fries and William Lattimore.

Morton G. Forbes, Savannah, Ga., for George Moore.

Bruce A. Howe, Savannah, Ga., for defendants-appellants.

Gilbert E. Andrews, Chief, Appellate Section, M. Carr Ferguson, Asst. Atty. Gen., Richard Farber, Mary L. Jennings, Attys., William A. Friedlander, Tax Div., Dept. of Justice, Washington, D. C., for defendant-appellee.

Appeals from the United States District Court for the Southern District of Georgia.

Before GEWIN, GEE and RUBIN, Circuit Judges.

ALVIN B. RUBIN, Circuit Judge:

An officer or employee of a corporation who is responsible for the collection of employment taxes from the pay due an employee may be assessed a penalty equal to the amount of the taxes if he willfully fails to account for and pay over the amount due to the United States. 26 U.S.C. § 6672. The government found such liability on the part of those parties who were simultaneously the officers, directors and stockholders of Savannah Inn & Country Club, Inc., and its general manager, George Moore. Although each of them protests that he had a title and position without genuine authority, each was, under the statute, a responsible person both at the time tax was withheld and at the later date when funds were available to pay it and were diverted to other purposes, and within the meaning of the statute the failure of each to perform his duty was willful; to paraphrase an aphorism of the late President Harry Truman, the corporate buck stopped with them. Accordingly, we affirm the judgment of the trial court granting the motion for summary judgment filed by the United States and denying the motion for summary judgment filed by the officers.

I.

Under the withholding system set up in the Internal Revenue Code, 26 U.S.C.A § 3401 Et seq., employers have a duty to collect both income and FICA ("socialsecurity") taxes from their employees. These sums are commonly referred to as "trust funds" because the Code provides that they are deemed to be "a special fund (held) in trust for the United States." 26 U.S.C. § 7501. When net wages are paid to the employee, the taxes that were, or should have been, withheld are credited to the employee even if they are never remitted to the government; so the IRS has recourse only against the employer for their payment.

However, Section 6672 of the Internal Revenue Code imposes a penalty on any "person required to collect, truthfully account for, and pay over any tax" withheld who willfully fails to do so. The penalty is equal to the total amount of the tax not paid over, and is itself referred to as a "tax" in Section 6671. The term "person," as defined in Section 6671, includes "an officer or employee of a corporation . . . who as such officer (or) employee . . . is under a duty" to collect, account for, and pay over the withheld tax. This is known as a "responsible person." Thus, liability for a penalty is imposed only on (1) a responsible person (as defined in Section 6671), who has (2) willfully failed to perform a duty to collect, account, "and" pay over the tax.

The statute has recently been explained by the Supreme Court in Slodov v. United States, 1978, 436 U.S. 238, 98 S.Ct. 1778, 56 L.Ed.2d 251. That case involved an orthodontist who, having no prior business connection with three food vending businesses, bought their stock and acquired their control after the sellers represented that the corporation had sufficient cash to pay its accrued liability for withheld employee wage and Federal Insurance Contribution Act (FICA) taxes, which amounted to $250,000. As soon as the orthodontist took command, he found that the representations were untrue; the corporations had no liquid assets. After reporting these findings to the Internal Revenue Service (IRS), he used his personal funds to finance corporate operations and paid all the taxes that later became due.

The initial question presented was whether the orthodontist was a "responsible person." As a postulate for resolving it, the Court stated that there is no question that the statute applies "(w)hen the same individual or individuals who caused the delinquency in any tax quarter are also the 'responsible persons' at the time the Government's efforts to collect from the employer have failed . . . ". 436 U.S. at 245, 98 S.Ct. at 1784, 56 L.Ed.2d at 260-61.

The taxpayer's first argument was that, because the statute uses the conjunctive "and," it reaches only persons who have all three duties: " 'to collect, truthfully account for And pay over any tax imposed by this title'." (Emphasis supplied). This, the court concluded, was a misreading: a person is responsible if he has a duty to perform any one of these functions collecting, accounting or paying over; the penalty is not limited "to those persons in a position to perform all three of the enumerated duties with respect to the tax dollars in question." 436 U.S. at 250, 98 S.Ct. at 1787, 56 L.Ed.2d at 263. The orthodontist was in authority when the corporation had a duty to pay over the taxes due; he might therefore be considered a "responsible person" if he himself had a duty at that time to apply available funds to payment of the taxes.

The Court next considered the scope of liability of an individual becoming a responsible person for the first time after withholding tax liability has accrued and the trust funds have been dissipated. It held that funds collected by the corporation after a change in corporate control are not impressed with a trust for taxes withheld during a prior regime unless those funds are directly traceable to dissipated trust funds; failure to use such later acquired funds to pay federal withholding taxes does not constitute a violation of the § 6672 requirement that the responsible person "pay over" withholding taxes. See 436 U.S. at 258, 98 S.Ct. at 1791, 56 L.Ed.2d at 269.

The trust § 7501 creates for funds withheld may in most circumstances be enforced. However, the liability of responsible persons generally is not limited to restoring actual cash diverted from the trust; it encompasses the duty to have initially or to collect funds to pay withholding taxes. Thus, if a corporation has only sufficient cash to pay net wages, and does so, there may literally be no funds to constitute the corpus of the trust, but the responsible persons are nevertheless liable for failure to collect withholding taxes; the United States may not be made an unwilling joint venturer in the corporate enterprise. Brown v. United States, 5 Cir. 1979, 591 F.2d 1136; Sorenson v. United States, 9 Cir. 1975, 521 F.2d 325; Pacific National Insurance Co. v. United States, 9 Cir. 1970, 422 F.2d 26, Cert. denied, 398 U.S. 937, 90 S.Ct. 1838, 26 L.Ed.2d 269. See also Frazier v. United States, 5 Cir. 1962, 304 F.2d 528.

It is in this light that we must read observations in Slodov that § 7501 and § 6672 do not "impress a trust on . . . after-acquired cash," 436 U.S. at 254, 98 S.Ct. at 1789, 56 L.Ed.2d at 266, or that § 6672 cannot "be construed as establishing a fiduciary obligation to pay over after-acquired cash unrelated to the withholding taxes." 436 U.S. at 255, 98 S.Ct. at 1789, 56 L.Ed.2d at 267. The orthodontist in Slodov was not subject to a § 6672 penalty because the funds he acquired after his accession to control were not subject to a trust, and his duty as a person assuming corporate control with respect to the accrued withholding tax liability was limited to paying any trust funds related to that liability and any other funds directly traceable to those trust funds that had been dissipated. Where there has been no change in control, however, responsible persons are subject to a duty to apply any available unencumbered funds to reduction of accrued withholding tax liability, whether or not those funds are deemed to be trust funds within the meaning of § 7501. See Maggy v. United States, 9 Cir. 1977, 560 F.2d 1372, 1376, and Teel v. United States, 9 Cir. 1976, 529 F.2d 903, 905. Although both Maggy and Teel stated that such funds are held in trust, this was unnecessary to the results reached in those cases. Furthermore, although those cases antedate Slodov, nothing in those opinions restrict their continued applicability. In fact, Slodov implicitly affirms their conclusions because the Court assumes at the outset that a penalty may be exacted from a person who was responsible both during the period withholding tax liability accrued and thereafter. 436 U.S. at 244-45, 98 S.Ct. at 1784, 56 L.Ed.2d at 260-61. The Court also specifically limited its holding to funds acquired after the responsible person's "accession to control." ¹ 436 U.S. at 258-59, 98 S.Ct. at 1791, 56 L.Ed.2d at 269.

At no point does Slodov reach the need to define the meaning of the term "willfully" with respect to individuals who were responsible persons both before and after withholding tax liability accrued. The term "willfully" is defined by prior cases as meaning, in general, a voluntary, conscious, and intentional act, such as payment of other creditors in preference to the United States, although bad motive or evil intent need not be shown. Liddon v. United States, 5 Cir. 1971, 448 F.2d 509, 513, Cert. denied, 1972, 406 U.S. 918, 92 S.Ct. 1769, 32 L.Ed.2d 117; Monday v. United States, 7 Cir. 1970, 421 F.2d 1210, 1216, Cert. denied, 400 U.S. 821, 91 S.Ct. 38, 27 L.Ed.2d 48; Hewitt v. United States, 5 Cir. 1967, 377 F.2d 921, 924. The willfulness requirement is satisfied if the responsible person acts with a reckless disregard of a known or obvious...