Barnett v. U.S., 76-2286

• Decision Date: 29 March 1979
• Docket Number: No. 76-2286,76-2286
• Citation: 594 F.2d 219
• Parties: 79-1 USTC P 9318 Richard H. BARNETT, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 219

594 F.2d 219

79-1 USTC P 9318

Richard H. BARNETT, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 76-2286.

United States Court of Appeals, Ninth Circuit.

March 29, 1979.

Jerome B. Falk, Jr. (argued), San Francisco, Cal., for plaintiff-appellant.

Michael J. Roach (argued), of Dept. of Justice, Washington, D. C., for defendant-appellee.

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

Before CARTER and WALLACE, Circuit Judges, and SOLOMON, ^* District Judge.

SOLOMON, District Judge.

Appellant, Richard Barnett, brought this action to recover a tax penalty of $144.20. The penalty is equal to income taxes and Federal Insurance Contributions Act taxes which the Rancho Linda School withheld from one employee's wages but did not pay to the government. The government filed a counterclaim for unpaid penalties of $24,459.29, because of unpaid taxes withheld from the wages of other employees. The District Court dismissed Barnett's action and granted summary judgment for the government.

The government assessed this penalty under a statute which provides that any responsible officer of a corporation "who willfully fails to collect (a withholding) tax, or truthfully account for and pay over such tax" is liable for a penalty equal to the unpaid tax. 26 U.S.C. § 6672.

In 1962, Barnett was a founder of the Rancho Linda School, a school for retarded and emotionally disturbed children. He was the president of the corporation and its administrator from January 1964, until September 1965, and therefore a "responsible officer" of the corporation who could be liable for a section 6672 penalty.

Barnett contends that the government is not entitled to summary judgment because there is a material issue of fact on whether he acted willfully in light of the circumstances surrounding the corporation's failure. The corporation was always in shaky financial condition. It failed to make required monthly deposits of collected taxes; it also failed to make timely quarterly withholding tax payments.

The corporation maintained its bank account at the Bank of America. In February 1965, it borrowed $25,000 from the bank which it agreed to pay by June 1, 1965.

As of September 23, 1965, the corporation had not paid back the loan. It also had not paid its withholding taxes for the second quarter (April, May and June 1965) nor had it made monthly deposits of the taxes collected for July and August.

The corporation paid employees and suppliers until September 23, and on that day had enough money in its account to meet all its tax obligations if the bank had not set off the loan against the corporation's account. Barnett contends that this setoff, which consumed almost all the corporation's funds, was unforeseen.

Shortly thereafter the corporation was dissolved and the taxes which the corporation withheld from employees' wages for the second and third quarters were never paid to the government.

Barnett contends that there is a material issue of fact on whether his conduct was based on a reasonable cause. He says the government knew of the corporation's situation and acquiesced in his efforts to keep it operating. He therefore asserts that his conduct was not willful and, in the alternative, he asserts that the government should be estopped from collecting this penalty. Conduct motivated by a reasonable cause may nevertheless be willful. Pacific National Insurance Co. v. United States 422 F.2d 26, 33 & n. 19 (9th Cir.), Cert. denied, 398 U.S. 937, 90 S.Ct. 1838, 26 L.Ed.2d 269 (1970). Even if the government was aware of Barnett's activities, knowledge alone does not negate willfulness or estop the government from penalizing the taxpayer's willful conduct.

The government contends that, regardless of these considerations, Barnett acted willfully as a matter of law as to all the unpaid taxes because the corporation paid other creditors when these taxes were owed.

A failure to pay over taxes is willful, for section 6672 purposes, if it is voluntary, knowing and intentional even though it is not done with a bad purpose or an evil motive. Sorenson v. United States, 521 F.2d 325, 328 (9th Cir. 1975); Bloom v. United States, 272 F.2d 215, 223 (9th Cir. 1959), Cert. denied, 363 U.S. 803, 80 S.Ct. 1236, 4 L.Ed.2d 1146 (1960).

One who pays other creditors, rather than pay withholding taxes to the government, is liable for a willful failure to pay such taxes. Maggy v. United States, 560 F.2d 1372, 1375-76 (9th Cir. 1977), Cert. denied, --- U.S. ----, 99 S.Ct. 86, 58 L.Ed.2d 112 (1978); Sorenson, supra, 521 F.2d at 328-29.

I. Second Quarter

The taxes for the second quarter were past due when the corporation was dissolved. Barnett admits that other creditors were paid after these taxes were due. His failure to pay the government the taxes collected for this quarter was therefore willful as a matter of law. The District Court properly entered summary judgment against Barnett for the penalty on the second quarter taxes.

II. Third...