Elmore v. U.S., 86-2260

• Decision Date: 06 April 1988
• Docket Number: No. 86-2260,86-2260
• Citation: 843 F.2d 1128
• Parties: -975, 88-1 USTC P 9267, Unempl.Ins.Rep. CCH 17982.5 Calvin F. ELMORE, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1128

843 F.2d 1128

61 A.F.T.R.2d 88-975, 88-1 USTC P 9267,

Unempl.Ins.Rep. CCH 17982.5

Calvin F. ELMORE, Appellant, v. UNITED STATES of America, Appellee.

No. 86-2260.

United States Court of Appeals,

Eighth Circuit.

Submitted Oct. 12, 1987.

Decided April 6, 1988.

Eugene G. Sayre, Little Rock, Ark., for appellant.

Patricia M. Bowman, Justice Dept., Washington, D.C., for appellee.

Before ARNOLD and BOWMAN, Circuit Judges, and HENLEY, Senior Circuit Judge.

HENLEY, Senior Circuit Judge.

This is an appeal from a final judgment entered by the district court upon a jury verdict finding appellant Calvin F. Elmore liable under 26 U.S.C. Sec. 6672 for failure to collect and pay over federal employment taxes required to have been withheld from the wages of employees of Digital Systems, Inc. (Digital) during the fourth quarter of 1980 and the first three quarters of 1981. Elmore challenges only that portion of the judgment holding him liable for the fourth quarter of 1980. Because we conclude that the district court erred in omitting a jury instruction, we vacate the judgment and remand for a new trial as to the quarter in question.

Elmore and his business partner, Ralph S. LaCotts, were each fifty per cent shareholders in Digital, a corporation located in Little Rock, Arkansas, primarily engaged in the production and sale of computer software. LaCotts, a practicing certified public accountant officed in DeWitt, Arkansas, served as president and treasurer of Digital and, until his death on December 20, 1980, assumed primary responsibility for the management of its daily business affairs. LaCotts arranged all corporate financing and directed the bookkeeping and accounting, including the payment of creditors and the remittance of employment taxes. Elmore served as vice president and secretary and, prior to LaCotts's death, did not generally participate in day-to-day operations. Although Elmore was authorized to sign corporate checks, his principal responsibilities concerned the sales of Digital's computers and software.

Ordinarily, Vickie Wiley, a bookkeeper hired by the corporation, prepared Digital's payroll and accounts payable checks as directed by LaCotts and mailed them to him to sign and file. Likewise, Wiley prepared the quarterly Form 941 federal employment tax returns and sent them to LaCotts for his signature.

The Form 941 return prepared for the second quarter of 1980 was returned to the corporation in Little Rock by the Internal Revenue Service (IRS) because it had been mailed unsigned. At LaCotts's direction, Elmore, who was based in Little Rock, signed the return as a corporate officer and mailed it back to the IRS. At that time, Elmore observed that the form indicated that the tax liability for the employees' withholding and FICA (social security) taxes had been deposited, leaving a $0.00 balance due. Elmore testified that he believed the Form 941 for the third quarter of 1980, which LaCotts also directed him to sign, had been prepared in an identical manner.

Sometime in December, 1980 LaCotts disclosed to Elmore that some of Digital's employment tax liability had not been satisfied, but that he was anticipating a loan which would permit the corporation to be refinanced and the taxes paid. Elmore testified that this was the first that he learned of the tax arrearage. Elmore also learned that the Form 941 returns which he had signed for the second and third quarters of 1980 were erroneous; the requisite funds to cover the employment tax liability had not in fact been deposited nor had any funds been sent to the IRS.

After LaCotts's death, Elmore assumed sole responsibility for corporate affairs. Apparently, throughout 1980 Digital exercised a practice permitting its salesmen, who were paid on commission, to make "draws" on the corporation when they needed money. The draws were treated as loans which were reduced accordingly when commissions were earned. The commissions were not reported as earned income, however, until a sale was completely closed. Upon assuming control, Elmore instructed Wiley to bring the commissions to date. Elmore had Wiley treat all of the sales as closed, which resulted in a showing of income earned by the salesmen during the fourth quarter of 1980 which had in reality been dissipated in previous quarters. This created an employment tax liability for these "earnings" alone in excess of $23,000.00. In addition, Elmore testified that Digital had no unencumbered funds at the time that he assumed control, and that he was unable to obtain the financing that LaCotts had hoped to acquire. ¹

In August, 1981 Elmore caused Digital to file a petition for reorganization under Chapter 11 of the Bankruptcy Code. Digital ceased operating shortly thereafter and the bankruptcy proceeding was dismissed. Although Elmore paid wages ² and costs and filed the quarterly Form 941 returns during the period that Digital was able to continue operations, no withholding taxes were remitted to the government.

In the fall of 1981, the IRS, pursuant to 26 U.S.C. Sec. 6672, assessed a one hundred per cent penalty in the amount of $54,547.80 against Elmore individually for Digital's unpaid withholding taxes accrued in the second, third and fourth quarters of 1980, and the first, second and third quarters of 1981. ³ In March, 1982 Elmore paid $154.40 toward this assessment and then filed with the IRS Form 843 claims for refund of the amount paid and abatement of the balance. In June, 1982 he was notified that these claims had been disallowed.

During this same time, the Arkansas Department of Finance and Administration proposed to assess a similar one hundred per cent penalty against Elmore for Digital's failure to remit Arkansas state withholding taxes from November, 1980 through July, 1981, as provided in Ark.Stat.Ann. Sec. 84-4707, (recodified at Ark.Code Ann. Sec. 26-51-916 (1987)). Elmore protested imposition of this penalty, and after an administrative hearing the State determined that Elmore was not responsible for the collection, accounting, or paying over of state withholding taxes at any time prior to January, 1981.

After receiving notice of the State's determination, Elmore requested the IRS to again consider his claims for refund and abatement. Before this request was considered, ⁴ Elmore instituted this suit for a refund against the United States; the IRS counterclaimed for the unpaid balance of its assessment. The case was tried to a jury. ⁵ Two special interrogatories for each taxable quarter were submitted. The interrogatories directed the jury to indicate for each quarter whether Elmore was responsible for the collection, accounting, or payment of taxes, and if so, whether his nonpayment was willful, both of which are essential elements to the imposition of liability under Sec. 6672. The jury found Elmore neither responsible nor willful for the second and third quarters of 1980, but found him both responsible and his failure to collect, account, or pay over willful for the remaining quarters. The district court entered judgment upon the verdict in favor of the government in the amount of $41,268.77, plus interest.

Thereafter, Elmore moved for partial judgment notwithstanding the verdict solely as to the fourth quarter of 1980. In his motion, Elmore argued that he was not liable for this period because he did not become "responsible" for the payment of withholding taxes within the meaning of Sec. 6672 until December 20, 1980, the date of LaCotts's death. Elmore insisted that at that time Digital had no unencumbered funds and that the district court erroneously instructed the jury that a person who is responsible at the time an employment tax return is due is responsible for any unpaid trust fund taxes for the entire quarter (Instruction No. 11). ⁶ Elmore reasserted the ground upon which he objected to the instruction at trial, its failure to inform the jury that in Slodov v. United States, 436 U.S. 238, 98 S.Ct. 1778, 56 L.Ed.2d 251 (1978), the Supreme Court held that a corporate official who becomes responsible after withholding tax liability has accrued is not responsible for payment of that liability if no unencumbered funds exist when he assumes control. Id. at 259-60, 98 S.Ct. at 1791-92.

The government resisted Elmore's motion, arguing that Elmore was responsible during the entire fourth quarter and that once he became aware of the unpaid taxes, he was required to satisfy that liability with all unencumbered funds. Moreover, the government stressed that it had introduced evidence indicating that there were funds in the corporate bank account at the time of LaCotts's death, and that Elmore did not establish that these funds were encumbered. Prior to a court ruling on the motion, Elmore also filed an untimely request that it be treated alternatively as a motion for a new trial. ⁷ The district court denied both motions after concluding that the jury's verdict was supported by substantial evidence. This appeal followed.

On appeal, Elmore argues (1) that Instruction No. 11 was erroneous because it failed to inform the jury of the circumstances recognized in Slodov; and (2) that the district court erred in denying his motion for partial judgment notwithstanding the verdict because of the asserted error in Instruction No. 11, and because of the court's refusal to admit certain proffered evidence, which effectively precluded the jury from finding in Elmore's favor as to the quarter in question.

We begin our analysis by briefly reciting the principles governing the imposition of liability under Sec. 6672. The Internal Revenue Code requires employers to withhold income and FICA taxes from their employees' wages. 26 U.S.C. Secs. 3102 & 3402; Emshwiller v. United States, 565 F.2d 1042, 1044 (8th Cir.1977). The withheld funds are to be deposited in a special trust by the employer for the benefit of the United States, to be periodically accounted for and paid over. 26 U.S.C. Sec....