Barnett v. I.R.S.

Decision Date28 April 1993
Docket NumberNo. 92-4733,92-4733
Citation988 F.2d 1449
Parties-1614, 93-1 USTC P 50,269, Unempl.Ins.Rep. (CCH) P 17250A Richard D. BARNETT, Plaintiff-Appellee, v. INTERNAL REVENUE SERVICE, Defendant-Appellant.
CourtU.S. Court of Appeals — Fifth Circuit

Sara S. Holderness, Gary R. Allen, Chief Trial Atty., Charles E. Brookhart, Neal I. Fowler, Trial Atty., Dept. of Justice, Appellate Section, Tax Div., Washington, DC, for defendant-appellant.

Warren D. Rush, Rush & Rush, Lafayette, LA, for plaintiff-appellee.

Appeal from the United States District Court for the Western District of Louisiana.

Before KING and EMILIO M. GARZA, Circuit Judges, and COBB, District Judge. *

KING, Circuit Judge:

The Internal Revenue Service appeals from the judgment of the district court denying its motion for judgment as a matter of law on the issue of Richard D. Barnett's liability under 26 U.S.C. § 6672(a). Because we conclude that the district court erred in denying the motion, we reverse and remand the action for further proceedings consistent with this opinion.

I.

The facts of this case relevant to our disposition of the primary legal issues are derived almost exclusively from the testimony offered by the plaintiff-appellee, Richard Barnett, and his witnesses at trial. In 1980, Barnett and Charles Anderson formed Anderson-Barnett Drilling Company, Inc. (the Company), to provide drilling services for oil and gas companies in southern Louisiana. Barnett and Anderson each retained twenty percent of the Company's stock, and the balance was sold to other investors recruited by Anderson. The Company's shareholders, including Barnett and Anderson, served as its directors. Barnett initially also served as vice-president of the Company. Anderson served as president and chief financial officer until March 1982, when Barnett succeeded him as president.

The Company maintained two offices, one in Lafayette, Louisiana, and the other in Lake Charles, Louisiana. Barnett ran the Company's field operations from the Lafayette office. His primary responsibility was directing the day-to-day operations of the Company's drilling rigs. In this capacity, he handled operational problems, purchased supplies, and hired, fired, and supervised the field personnel. He also did "sales" work--contacting potential customers, bidding on jobs, and negotiating drilling contracts. Anderson, a certified public accountant, took care of the Company's bookkeeping and financial affairs at the Lake Charles office. His responsibilities included maintaining the Company's financial books and records, filing tax returns supervising the payroll, and paying creditors.

According to Anderson and Barnett's testimony, the two men also shared certain responsibilities. Barnett would review bills sent to the Company by creditors and occasionally make recommendations to Anderson regarding whether certain creditors should be paid. 1 Anderson testified, however, that he had the "final word" about the payment of creditors. Barnett and Anderson also conferred about major business decisions affecting the finances of the Company, including the acquisition and financing of new equipment. With respect to such business decisions, Anderson did not have the "final word"; rather, decisions were mutual. 2 On at least one occasion, Barnett himself successfully negotiated a loan with the First Bank of Lafayette for the purchase of equipment.

The Company maintained three checking accounts--two in Lake Charles and one in Lafayette. The Lake Charles accounts were used for payroll and for general operating expenses. The Lafayette account was used primarily to purchase supplies for the Company's rigs. The checkbook for the latter account was maintained by Barnett at the Lafayette office. Barnett was authorized to sign checks, without Anderson's permission, and he did so on numerous occasions. Although the checkbooks for the other two accounts were kept at the Lake Charles office, it is undisputed that Barnett was authorized to sign checks drawn on both accounts and, again, could do so without Anderson's permission. On at least one occasion prior to taking over as president in March 1982, Barnett signed payroll checks when Anderson was out of town. After he became president, Barnett signed checks drawn on this account to pay employees as well as outside creditors.

Barnett testified that, despite his central role in the day-to-day business operations of the Company, his knowledge of its financial affairs was limited. For the most part, he simply allowed Anderson to run the financial side of the business. Moreover, because Barnett made only infrequent trips to the Lake Charles office, he had limited access to the Company's financial records until he took over as president in March 1982. When Barnett, in his capacity as vice president, did request "financial updates" from Anderson, he was "assured" that "everything was going all right." It is unmistakable from his testimony, however, that Barnett believed, by virtue of his position in the Company, that he had a right to know the financial condition of the business. 3 Barnett simply was so busy with the day-to-day business of the Company that he relied on Anderson's oral assurances: "I was more than convinced [that the financial affairs of the Company were extremely sound.] Charlie's assurances were very believable."

In 1981, the Company began experiencing financial difficulties. By early 1982, the Company's cash flow was drying up; creditors complained and checks were being returned for insufficient funds. In response to these problems, Barnett, still acting as vice president, met with creditors in an effort to restructure the financing of the Company's rigs. He also hired an accountant, Dorothy Level, to help him examine the Company's financial records. Anderson, however, refused to provide Barnett with the financial information he requested.

In March 1982, Barnett organized a directors meeting. At this meeting, Anderson resigned as president, and Barnett took his place. After a review of the Company's financial records revealed that Anderson had not been paying over taxes withheld from employees' paychecks to the United States, Barnett confronted Anderson, who denied that the taxes had not been paid. On April 12, 1982, however, Anderson confessed to Barnett and the other stockholders that the withheld taxes had indeed not been paid.

Significant deposits were made into the Company's Lafayette checking account after April 12, 1982, the date when Barnett first became aware that Anderson had not paid over the taxes. On April 13, the Company received a $375,000 payment from a customer, which was immediately offset by the depository bank to satisfy an outstanding loan. In the following weeks, however, other deposits, which were not offset, totalled $492,101.12. None of these funds were ever used to pay the Company's accrued withholding tax liability, which by the end of the first quarter of 1982 was $604,509.91. Instead, Barnett wrote checks for the payroll and to pay others, including a check for $72,590.68, made payable to himself, and a check for $20,000, made payable to cash. Several months later, the Company filed for bankruptcy.

In accordance with 26 U.S.C. § 6672(a), the Internal Revenue Service (IRS) assessed Barnett and Anderson $604,509.91, which represented a one-hundred percent penalty for the Company's unpaid withholding taxes for the second, third, and fourth quarters of 1981 and the first quarter of 1982. Barnett paid $200 in partial satisfaction of the assessment, and the IRS applied credits of $2,382.24. When Barnett's claim for a refund was denied, he filed this refund suit in the district court. The IRS filed a counterclaim seeking recovery of the balance of the assessment, $600,623.67, plus statutory interest and additions. The IRS also joined Anderson as a third party defendant. On December 17, 1990, the district court granted summary judgment in favor of the IRS with respect to its claims against Anderson.

Barnett's case was tried before a jury in February 1992. At the close of the evidence, the IRS moved for judgment as a matter of law 4 on the issue of Barnett's § 6672(a) liability. The district court denied the motion and submitted to the jury instructions essentially tracking the elements of § 6672(a), asking whether Barnett was a "responsible person" in the Company who "willfully" failed to pay over withholding taxes. 5 The jury found that Barnett was not a "responsible person" for purposes of the statute and, therefore, never reached the issue of whether Barnett had willfully failed to pay the taxes.

Pursuant to Rule 50 of the Federal Rules of Civil Procedure, the IRS filed a renewed motion for judgment as a matter of law or, in the alternative, for a new trial. The district court denied the motion, observing that it agreed with the jury's verdict because, under the circumstances, it was "just not fair" to hold Barnett liable. The court reasoned that Anderson was "the responsible party" because "he hid everything from everybody else" and "he was totally in control." This appeal ensued.

II.

In reviewing the disposition of the IRS's post-verdict motion for judgment as a matter of law, we apply the same standard applied by the district court. Normand v. Research Institute of America, Inc., 927 F.2d 857, 859 (5th Cir.1991). We consider all of the evidence in the light and with all reasonable inferences most favorable to the party opposed to the motion. See Boeing Co. v. Shipman, 411 F.2d 365, 374 (5th Cir.1969) (en banc). If the facts and the inferences point so strongly and overwhelmingly in favor of one party that we believe that reasonable jurors could not arrive at a contrary verdict, then the motion should have been granted. See id. On the other hand, if there is substantial evidence opposed to the motion--that is, evidence of such quality and...

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