Olsen v. U.S.

• Decision Date: 26 December 1991
• Docket Number: No. 91-1440,91-1440
• Citation: 952 F.2d 236
• Parties: -395, 92-1 USTC P 50,036, Unempl.Ins.Rep. (CCH) P 16588A Douglas A. OLSEN, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 236

952 F.2d 236

69 A.F.T.R.2d 92-395, 92-1 USTC P 50,036,

Unempl.Ins.Rep. (CCH) P 16588A

Douglas A. OLSEN, Appellant, v. UNITED STATES of America, Appellee.

No. 91-1440.

United States Court of Appeals,

Eighth Circuit.

Submitted Nov. 12, 1991.

Decided Dec. 26, 1991.

R. Donald Hawkinson, Minneapolis, Minn., argued, for appellant.

Paula K. Speck, argued (Shirley D. Peterson, Gary R. Allen, Kenneth L. Greene, Christine A. Grant and Jerome G. Arnold, of counsel, on the brief), Washington, D.C., for appellee.

Before LAY, Chief Judge, ARNOLD, Circuit Judge, and STUART ^*, Senior District Judge.

STUART, Senior District Judge.

Appellant Olsen claims that the Internal Revenue Service (IRS) wrongfully imposed a 100% penalty against him under I.R.C. § 6672 (1988). He seeks a tax refund of $45,615.85. The principal issue in the case is whether Olsen, concededly a "responsible person" under § 6672, willfully failed to pay over to the IRS withheld federal employment taxes collected by his corporation, Precision Machine and Design, Inc. (Precision Machine). Olsen also claims that he is not liable for the corporation's taxes because he relied on IRS assurances that the taxes would be collected from the corporation's assets. The case was presented to Judge Devitt ¹ on cross motions for summary judgment. He granted the government's motion and denied Olsen's motion. Olsen appealed. We affirm.

Sections 3102 and 3402 of the Internal Revenue Code require employers to withhold federal social security and income taxes from the wages of their employees. "Once taxes are collected they become a trust fund in the hands of the employer. 26 U.S.C.A. § 7501. The liability for payment of taxes collected arises upon the collection of those taxes and not the date when the statute requires that they be paid over to the government." Long v. Bacon 239 F.Supp. 911, 912 (S.D.Iowa, 1965). See also Mulee v. United States, 648 F.Supp. 1181, 1185 (N.D.Ill.1986), and citations therein. If an employer withholds the taxes but fails to pay them over to the government, the employee is nevertheless credited with payment. Slodov v. United States, 436 U.S. 238, 243, 98 S.Ct. 1778, 1783, 56 L.Ed.2d 251 (1978); Donelan Phelps & Co. v. United States, 876 F.2d 1373, 1375 (8th Cir.1989); Elmore v. United States, 843 F.2d 1128, 1132 (8th Cir.1988). Thus, unless the government has recourse against the person or persons responsible for nonpayment, the taxes will be lost. Slodov, 436 U.S. at 243, 98 S.Ct. at 1783; Hartman v. United States, 538 F.2d 1336, 1340 (8th Cir.1976).

To protect against such losses, I.R.C. § 6672 provides that when a person required to collect, account for, and pay over withholding taxes (i.e., a "responsible person") willfully fails to do so, he is liable for a penalty equal to the amount of the unpaid taxes. Smith v. United States, 894 F.2d 1549, 1553 (11th Cir.1990); Elmore, 843 F.2d at 1132; Bowen v. United States, 836 F.2d 965, 968 (5th Cir.1988). Although denominated a "penalty," the liability imposed Section 6672 imposes liability on an individual if two requirements are met: (1) the person must be a "responsible person," and (2) the person must act "willfully" in not paying over the taxes. Kizzier v. United States, 598 F.2d 1128, 1132 (8th Cir.1979). The responsible person has the burden to show that he did not willfully fail to pay over the federal employment taxes. Anderson v. United States, 561 F.2d 162, 165 (8th Cir.1977).

                by § 6672 is not penal in nature, since it brings to the government only the same amount to which it was entitled by way of the tax.  Hartman, 538 F.2d at 1340;  Newsome v. United States, 431 F.2d 742, 745 (5th Cir.1970).   Thus, § 6672 "is simply a means of ensuring that the tax is paid...."  Botta v. Scanlon, 314 F.2d 392, 393 (2d Cir.1963).   In keeping with this purpose, § 6672 has been broadly and liberally construed "to prevent the unnecessary loss of tax funds by permitting the 'taxing authority to reach those responsible for the corporation's failure to pay the taxes which are owing.' "  Newsome, 431 F.2d at 745 (quoting Monday v. United States, 421 F.2d 1210, 1216 (7th Cir.), cert. denied, 400 U.S. 821, 91 S.Ct. 38, 27 L.Ed.2d 48 (1970))
                

FACTS

Appellant purchased the stock of Precision Machine in 1975 and served as president and chief executive officer until operations ceased in June 1985. In 1982, he and an IRS agent discussed federal employment tax liabilities of Precision Machine. In 1984, Precision Machine entered into an agreement with IRS to pay federal employment taxes for the third and fourth quarters of 1982 and the second quarter of 1983 in installments. Payments were made on this agreement throughout the relevant period. However, the agreement provided that it became null and void if the employer failed to keep its withholding obligations current.

In the spring of 1985 Precision Machine experienced extreme financial difficulties. Payments were made to creditors other than IRS for materials and services that were necessary to keep the corporation operating. Employee taxes were withheld but were not paid to IRS. During March, April and May 1985, Olsen negotiated with banks, suppliers and customers but was unable to make arrangements necessary to keep the corporation operational.

In early June, Olsen decided to "wind the corporation down." This decision brought about several meetings with the Carver County State Bank (the bank), a secured creditor, which resulted in the bank taking control of the accounts receivable and requiring its approval of the disbursements. On June 24, 1985 Olsen initiated a meeting with IRS agents Chandler and Drogue. He identified the assets of Precision Machine, including its accounts receivable. The total value exceeded the employee taxes due the federal government. He was assured by them that the IRS was in a superior position to all creditors, including the bank, and that the taxes would be collected from the corporation's assets.

On June 25, 1985 the IRS served notice of levy on the bank and twenty-one of Precision Machine's customers. On July 17, 1985, the bank changed the locks on Precision Machine's doors. The same day IRS served notice of levy on other customers of Precision Machine. The IRS lien on Precision Machine property was inferior to the liens of the bank and the government was unable to collect the employee taxes from Precision Machine's assets.

On February 25, 1986, Olsen, as a responsible person under § 6672, was assessed a penalty of 100% of the unpaid withheld taxes for the fourth quarter of 1982, the second and third quarters of 1983 and the first and second quarters of 1985. On August 7, 1989, Olsen and his wife sold their home and paid IRS the amount allegedly due IRS out of the proceeds. Thereafter this action for refund of the taxes was filed.

DISCUSSION

Olsen concedes he is a responsible person but argues that he did not willfully fail to pay over the employee taxes because he made the best efforts to ensure that the taxes would be paid from corporation assets. He argues that:

At all times the corporation had assets sufficient to cover those deficiencies. Mr. Olsen, believing that direct dealings with the IRS would be the most responsible, productive, and effective method of collecting the taxes, approached the IRS and described the assets for the IRS, described their location, and provided the IRS with a method of collecting those assets. The IRS then assured Mr. Olsen that he had taken the correct course of action and told Mr. Olsen that they could and would collect these assets to pay the tax deficiencies. Relying on that information, Mr. Olsen left the IRS with the confidence that the taxes would in fact be collected. More importantly, Mr. Olsen believed that he would not need to undertake any action personally to collect these taxes but that the IRS would because they could do so more effectively and efficiently. All the while, Mr. Olsen could have collected the accounts receivable himself by merely going to each business which owed Precision Machine money and personally picking up the drafts.

Although similar arguments have been considered in some cases in determining whether a person acted willfully as used in § 6672, see Mangieri v. United States, 86-2 U.S. Tax Cas. (CCH) p 9824, 657 F.Supp. 726 (D.Md.1986); Sawyer v. United States, 86-2 U.S. Tax Cas. (CCH) p 9745, 1986 WL 12874 (N.D.Ind.1986), rev'd, 831 F.2d 755 (7th Cir.1987); Kraus v. United States, 85-1 U.S. Tax Cas. (CCH) p 9310, 1985 WL 6230 (E.D.N.Y.1985); Tozier v. United States, 65-2 U.S. Tax Cas. (CCH) p 9621 (W.D.Wash.1965), the argument more nearly resembles one of estoppel. See, e.g., Mulee, 648 F.Supp. at 1186-87. For that reason we will treat separately the questions of willfulness and estoppel.

(A) Willfulness

A responsible person acts willfully within the meaning of § 6672 whenever he "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." Hartman, 538 F.2d at 1341. Accord Bowen, 836 F.2d at 968; Kizzier, 598 F.2d at 1132. A responsible person also acts willfully by proceeding with a " 'reckless disregard of a known or obvious risk that trust funds may not be remitted to the government.' " Wood v. United States, 808 F.2d 411, 415 (5th Cir.1987) (quoting Brown v. United States, 591 F.2d 1136, 1140 (5th Cir.1979)); Mazo v. United States, 591 F.2d 1151, 1154 (5th Cir.), cert. denied sub nom. Lattimore v. United States, 444 U.S. 842, 100 S.Ct. 82, 62 L.Ed.2d 54 (1979).

Evidence that the responsible person had knowledge of payments to other creditors, including employees, after he was aware of the failure to pay over withholding taxes is proof of willfulness as a matter of law. See Emshwiller v. United States, 565 F.2d 1042, 1045 (8th Cir.1977). See also Hochstein v. United...