961 F.2d 867 (9th Cir. 1992), 90-16209, Davis v. United States

Docket Nº:90-16209.
Citation:961 F.2d 867
Party Name:Unempl.Ins.Rep. (CCH) P 16859A Dan O. DAVIS, Plaintiff-counter-claim-defendant-Appellant, v. UNITED STATES of America, Defendant-counter-claimant-Appellee.
Case Date:April 14, 1992
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

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961 F.2d 867 (9th Cir. 1992)

Unempl.Ins.Rep. (CCH) P 16859A

Dan O. DAVIS, Plaintiff-counter-claim-defendant-Appellant,


UNITED STATES of America, Defendant-counter-claimant-Appellee.

No. 90-16209.

United States Court of Appeals, Ninth Circuit

April 14, 1992

Argued and Submitted Oct. 10, 1991.

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[Copyrighted Material Omitted]

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David M. Kirsch, San Jose, Cal., for plaintiff-counter-claim-defendant-appellant.

Bruce R. Ellisen, Tax Div., U.S. Dept. of Justice, Washington, D.C., for defendant-counter-claimant-appellee.

Appeal from the United States District Court for the Northern District of California.

Before: CHAMBERS, TANG and TROTT, Circuit Judges.

TANG, Circuit Judge:

Dan Davis, the president and major shareholder of ITAC Corporation, appeals a jury verdict finding him liable for willfully failing to pay withholding and social security taxes for ITAC's employees for the last quarter of 1981 and the first two quarters of 1982. Davis had argued that he was not a responsible officer and that his subsequent preference of other creditors over the Internal Revenue Service ("IRS") did not evince "willfulness." The district court refused to instruct the jury on Davis's definition of willfulness. The jury subsequently found Davis liable for the employee taxes owed the government. The district court also denied Davis's motion to reduce the assessment for the last quarter of 1981. Davis appeals. We affirm.


A. Statutory Framework

The Internal Revenue Code requires employers such as ITAC Corporation ("ITAC") to withhold federal social security and individual income taxes from the wages of their employees. 26 U.S.C. §§ 3102(a), 3402(a). 1 Although an employer collects this money each salary period, payment to the federal government takes place on a quarterly basis. In the interim, the employer holds the collected taxes in trust for the government. 26 U.S.C. § 7501(a). These taxes accordingly are known as "trust fund taxes." Slodov v. United States, 436 U.S. 238, 243, 98 S.Ct. 1778, 1783, 56 L.Ed.2d 251 (1978). Other taxes, such as those directly owed by the business, are referred to as "non-trust fund taxes."

Once net wages are paid to an employee, the government credits that employee with the tax payments, regardless of whether the taxes are ultimately paid over by the employer. Id. In order to protect against revenue losses, the tax code offers the IRS a variety of means of recovering from employers who fail to pay over collected employee taxes. In addition to tax liens, 26 U.S.C. § 6321, and criminal penalties, 26 U.S.C. §§ 7202, 7215, the IRS may assess a civil penalty against responsible corporate officials equal to the amount of delinquent trust fund taxes ("100% penalty"), 26 U.S.C. § 6672. Section 6672 provides, in relevant part:

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.

A "person," for purposes of section 6672, includes "an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs." 26 U.S.C. § 6671(b). The recovery of a penalty under section 6672 entails showing

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that the individual both was a "responsible person" and acted willfully in failing to collect or pay over the withheld taxes. Maggy v. United States, 560 F.2d 1372, 1374 (9th Cir.1977), cert. denied, 439 U.S. 821, 99 S.Ct. 86, 58 L.Ed.2d 112 (1978).

B. Factual History

Dan Davis helped to organize ITAC in the mid-1970s. During the time in question, Davis was ITAC's president, a member of its board of directors, and its major shareholder.

ITAC failed to pay its employees' withheld social security and income taxes during the last quarter of 1981 and the first two quarters of 1982. Davis claims that he did not learn of this default until after July 31, 1982, at which time the payments for all three quarters were past due.

In October 1987, ITAC began paying the delinquent taxes on an installment basis. In the course of making these payments, ITAC never designated to which quarter or liability they should apply, leaving the allocation to the IRS's discretion.

Prior to calculating the 100% penalty against Davis, the IRS learned that no corporate assets were available to satisfy ITAC's non-trust fund tax liability. This prompted the IRS to reallocate funds originally used to reduce the trust fund tax debt to cover the non-trust fund taxes owed. The IRS contends that this reallocation was necessary to ensure full collection of both trust fund taxes (which can be recovered from either ITAC or a responsible officer) and non-trust fund taxes (generally chargeable only to ITAC).

Upon receiving his section 6672 penalty assessment, Davis paid $100 of the $69,791 penalty and filed a refund suit in federal district court. 2 The government counterclaimed for the remainder of the penalty plus interest and fees.

At trial, Davis contested both his status as a responsible person and the issue of willfulness. With respect to willfulness, Davis argued that he was unaware of ITAC's failure to make the tax payments until the money was overdue and the collected funds held in trust had been completely dissipated. Davis conceded that, after learning of the delict, he made payments to commercial creditors rather than to the IRS. These payments exceeded the amount of taxes due. Davis insists that these facts do not demonstrate willfulness because, under Slodov v. United States, 436 U.S. 238, 98 S.Ct. 1778, 56 L.Ed.2d 251 (1978), he had no obligation to use corporate funds acquired after the quarterly payments became due ("after-acquired funds") exclusively to satisfy the IRS obligation.

The district court disagreed with Davis's interpretation of Slodov, concluding that the use of after-acquired funds to pay creditors other than the IRS demonstrated willfulness. Accordingly, the district court declined to offer Davis's proposed jury instructions on willfulness, advising the jury instead:

The term "Willfully" means only that the act of failing to collect, account for, or pay over the taxes was done voluntarily, consciously, and intentionally. If Dan O. Davis voluntarily, consciously, and intentionally used the trust funds which were withheld, or caused or allowed them to be used for any other purpose other than payment of taxes, he is deemed to have acted willfully.... The only thing that need be shown is that [Davis] made a deliberate choice to pay other creditors instead of paying the Government.

On February 22, 1990, the jury returned a verdict finding that Davis was a "responsible person" throughout all three quarters in question and that Davis's failure to pay over the taxes each quarter was willful.

In March 1990, Davis filed a post-trial motion seeking a reduction of the penalty assessed for the fourth quarter of 1981. Davis argued that the effect of the IRS's

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reallocation of payments originally credited to that quarter was to increase his 100% penalty from $2,888.98 to $18,848.19. Davis contended that, once payments are credited to a specific tax debt, the IRS cannot later reallocate those payments to a different debt. Davis also argued that the IRS impermissibly allocated ITAC payments to liabilities that had not yet been assessed and failed to notify ITAC of how its funds had been allocated. The district court denied the motion for reduction of penalty.

On July 16, 1991, the district court formally entered judgment for the IRS. Davis filed a timely notice of appeal to this court.


I. The "Willfulness" Instruction

On appeal, Davis does not challenge the jury's conclusion that he was a "responsible person" during the three quarters in which trust fund taxes were not paid over to the IRS. Davis argues only that, as a matter of law, he did not act willfully. Davis insists that, because he lacked knowledge of ITAC's failure to pay the taxes until after they were due, his subsequent use of corporate revenues to compensate other creditors rather than to pay the delinquent taxes does not evince willfulness. Davis contends that he deferred payments to the IRS in an attempt to resuscitate ITAC and thereby maximize the chances that the taxes would be repaid in full over time. To hold otherwise, Davis continues, would encourage management to walk away from the corporation or discontinue business upon learning of a back tax liability, rather than expose themselves to personal liability for the tax debt by continuing to pay the corporation's bills.

We review de novo the question whether the district court's jury instructions properly stated the law. Collins v. City of San Diego, 841 F.2d 337, 340 (9th Cir.1988).

We reject Davis's argument as inconsistent with the definition of willfulness promulgated by the Supreme Court and all other courts of appeals presented with the like claim. Davis's theory, moreover, would reward responsible corporate officers for their ignorance and force the federal government to subsidize management efforts to revive private corporations.

A. Definition of Willfulness

Willfulness, within the meaning of section 6672, has been defined as a " 'voluntary, conscious and intentional act to prefer other creditors over the United States.' " Klotz v. United States, 602 F.2d 920, 923 (9th Cir.1979) (quoting Sorenson v. United States, 521 F.2d 325, 328 (9th Cir.1975)); see also Maggy, 560 F.2d at 1375; Teel v. United States, 529 F.2d 903, 905 (9th Cir.1976). An intent to defraud...

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