Smith v. U.S., 89-3224
| Decision Date | 01 March 1990 |
| Docket Number | No. 89-3224,89-3224 |
| Citation | 894 F.2d 1549 |
| Parties | 90-1 USTC P 50,134, Bankr. L. Rep. P 73,317 James C. SMITH, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
Gary R. Allen, Chief, Appellate Section, Tax Div., Dept. of Justice, Washington, D.C., Robert L. Baker, for defendant-appellant.
E. Gary Work, Jr., Pensacola, Fla., for plaintiff-appellee.
Appeal from the United States District Court for the Northern District of Florida.
Before JOHNSON and ANDERSON, Circuit Judges, and TUTTLE, Senior Circuit Judge.
This case arises on appeal from the district court's denial of the Government's motion under Federal Rule of Civil Procedure 50(b) for judgment notwithstanding the verdict.
James C. Smith was the founder, controlling stockholder and president of Smith Plumbing and Heating, Inc. ("SPH") in Fort Walton Beach, Florida. SPH was a plumbing, heating, and air conditioning installation firm that served the southeast. From 1963 to 1973, Smith managed the business himself, soliciting contracts, hiring employees, and signing paychecks. By 1973 the business had grown to such an extent that Smith had to hire an executive vice-president and general manager, Ralph Rivers, to assist Smith in managing the business. Smith shared the duties of managing the firm with Rivers, who consulted Smith concerning major decisions. Smith, Rivers, and Selma Davis, the bookkeeper, were all authorized to sign company checks. Two signatures, however, were required on every SPH check.
Hazel Caine was responsible for preparing the payroll checks at SPH. Usually the payroll checks were pre-signed by Davis, prepared by Caine, and then signed by Rivers. SPH deducted payroll taxes from employees' weekly checks, and the payroll deductions were deposited into the First National Bank on the third business day after payday. SPH stopped making the payroll deduction deposits on July 1, 1974.
In early 1974, the construction industry entered a decline, and SPH began to have financial difficulties. By June of 1974, SPH's cash flow problem had become so severe that some of SPH's payroll checks were bouncing. In June 1974, Daniel Berry was assigned comptroller of SPH. Berry was concerned with the declining fortunes of SPH and, in early July 1974, tried to initiate discussions with Rivers and Smith about the company's financial problems. Berry first approached Rivers to discuss SPH's financial troubles, but Rivers rebuffed Berry. Berry then tried to approach Smith about the problems, but Smith told Berry that he had to go through Rivers. Later that month, after another attempt to go through Rivers, Berry succeeded in discussing the problems with Smith. 1 Smith then became directly involved in reviewing SPH's financial condition.
During the first week in August, Smith asked SPH's accountant, Julius Prokop, to review SPH's situation. Prokop recommended that the company file for protection under Chapter 11 of the Bankruptcy Code, and SPH petitioned for bankruptcy on August 13, 1974. At that time, SPH owed the Government $65,966 in payroll deductions from SPH's employees' checks. SPH never paid $47,963 of these taxes.
On July 19, 1983, the IRS notified Smith that it had been unable to collect the $47,963 and that it was going to assess a penalty against Smith, pursuant to section 6672 of the Internal Revenue Code ("the Code"), as a person required to collect, account for, and pay over SPH's payroll withholdings. Smith paid the assessment and timely filed a claim for a refund. On May 22, 1988, Smith sued for a refund of the penalty assessment.
The district court held a jury trial on November 9-10, 1988. Smith testified that he could not pinpoint the date on which he became aware of SPH's failure to deposit the July payroll deductions, but he stated that he became aware "right in the middle of filing [for bankruptcy], right around the last of July, first of August." Rivers testified that he became aware of the tax problem at about the time that SPH decided to file for bankruptcy. Prokop testified that he first became concerned about the payroll taxes when he met with SPH's bankruptcy attorney Alan Rosenbloum. Berry testified that he became aware of the problem in the last five days before the bankruptcy.
Smith testified that at the time of the bankruptcy filing SPH had sufficient funds in its accounts to pay the delinquent taxes but not enough to pay all of SPH's debts. Smith stated that Prokop had told him that a payment to the IRS would be a voidable preference of one creditor and would be set aside by a bankruptcy court. Smith acknowledged however, that SPH had continued to meet its payroll during the first weeks of August and that it had prepaid its rent up to September 1, 1974. 2 Prokop testified that shortly before the bankruptcy petition was filed he and Smith met with an IRS agent named William Jones and that Smith and Prokop asked Jones to levy SPH's account in order to meet the delinquency. According to Prokop, Jones responded that the IRS was without power to levy SPH's account until after a delinquency was formally assessed. 3
The Government moved for a directed verdict at the close of Smith's case. The court denied this motion. The Government again moved for a directed verdict at the close of its case. The district court directed a verdict on the issue of whether Smith was a "responsible person" within the meaning of Code section 6672. The court refused, however, to direct a verdict on the issue of whether Smith acted "willfully" within the meaning of section 6672. The district court orally ruled that Smith's testimony regarding Prokop's instruction not to pay the IRS, coupled with Jones's statement that the IRS would not levy SPH's account, raised an issue of willfulness for the jury.
The jury returned a verdict for Smith. On December 22, 1988, the district court entered a judgment for Smith in the amount of $51,855 plus interest. On January 9, 1989, the Government moved for a judgment notwithstanding the verdict under Rule 50(b). The district court denied this motion without opinion.
In this appeal we consider whether the district court erred in refusing to rule that Smith's actions were willful as a matter of law under the evidence presented. We also consider whether SPH's bankruptcy affects Smith's liability under section 6672.
In reviewing a district court's denial of a motion for judgment notwithstanding the verdict, this Court views all of the evidence in the light most favorable to the nonmoving party. Thibodeau v. United States, 828 F.2d 1499, 1503 (11th Cir.1987). A motion for a directed verdict will be granted only if, viewing the evidence in its entirety and drawing all reasonable inferences in favor of the nonmoving party, no reasonable jury could reach a contrary verdict. Id. The moving party is entitled to a directed verdict if the nonmoving party failed to make a showing on an essential element of his case with respect to which he had the burden of proof. See Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986).
The Code and the regulations thereunder require employers to withhold from employees' paychecks the employees' share of FICA taxes and income taxes. See Slodov v. United States, 436 U.S. 238, 242-43, 98 S.Ct. 1778, 1782-83, 56 L.Ed.2d 251 (1978); 26 C.F.R. Secs. 31.6011(a)-1, 31.6011(a)-4. Once the employer deducts funds from the employees' checks, the Government credits the employees for the funds withheld. Regardless of whether or not the employer pays the withheld taxes over to the Government the Government's only recourse is against the employer. Slodov, 436 U.S. at 243, 98 S.Ct. at 1783. Withheld funds constitute a trust in favor of the United States from the time that the employer deducts them from employees' checks, and the employer is liable to the Government for any amounts withheld. Id.; Code Sec. 7501(a).
Officers or employees responsible for the collection and payment of withholding taxes who willfully fail to do so are personally liable for a "penalty" equal to the amount of the delinquent taxes. Slodov, 436 U.S. at 244-45, 98 S.Ct. at 1783-84. Section 6672 of the Code provides:
Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.
Code Sec. 6672. Section 6671(b) of the Code provides that "[t]he term 'person', as used in this subchapter, includes an officer or employee of a corporation ... who as such officer, [or] employee ... is under a duty to perform the act in respect of which the violation occurs." Code Sec. 6671(b).
Section 6672 was designed to ensure that employers would comply with their obligation to withhold taxes and to pay the taxes withheld by subjecting the employers' officers responsible for the withholding and payment of taxes to personal liability. Slodov, 436 U.S. at 247, 98 S.Ct. at 1785. The section applies to any officer who is responsible for decisions regarding any portion of the collection, accounting for, or paying over of withholding taxes. Id. at 250, 98 S.Ct. at 1786.
In the instant case, the district court properly directed a verdict that Smith was a "responsible person" within the meaning of section 6672. The courts have generally taken a broad view of who constitutes a responsible person. See id. at 246-50, 98 S.Ct. at 1784-87; Liddon v. United States, 448 F.2d 509, 512 (5th Cir.1971) ...
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