Brown v. U.S.

• Decision Date: 23 March 1979
• Docket Number: No. 76-2381,76-2381
• Citation: 591 F.2d 1136
• Parties: 79-1 USTC P 9285 Ralph H. BROWN, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Third Party Plaintiff-Appellee, v. Don R. SIBLEY, Third Party Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1136

591 F.2d 1136

79-1 USTC P 9285

Ralph H. BROWN, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Third Party Plaintiff-Appellee, v. Don R. SIBLEY, Third Party Defendant-Appellant.

No. 76-2381.

United States Court of Appeals, Fifth Circuit.

March 23, 1979.

Harry R. Nelson, Shreveport, La., for third party defendant-appellant.

Edward L. Shaheen, U. S. Atty., Shreveport, La., Gilbert E. Andrews, Acting Chief, William A. Friedlander, James E. Crowe, Jr., Attys., App. Section, Dept. of Justice, Washington, D. C., for U. S.

Joel M. Sermons, Shreveport, La., for Brown.

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

Before GEWIN, GEE and RUBIN, Circuit Judges.

ALVIN B. RUBIN, Circuit Judge:

Section 6672 of the Internal Revenue Code of 1954, 26 U.S.C. § 6672, provides that responsible persons who "willfully" fail to ensure that their corporation pays federal withholding taxes are liable for a penalty in the amount not paid. This case involves questions concerning the liability of two officers, Ralph H. Brown and Don R. Sibley, of Sibwin, Inc. for penalties under § 6672 because of Sibwin's failure to pay withholding taxes for the first quarter of 1972. ¹ Each asserts that the other was the only person responsible for seeing that the liability was paid, and is, therefore, the only one liable for a § 6672 penalty. In addition, each asserts that, even if he was a responsible person during the first quarter, he did not "willfully" fail to ensure that the taxes were paid because the corporation had no unencumbered funds available to pay the tax. We conclude, however, that both of them were responsible officers, that they both willfully failed to ensure that Sibwin paid its withholding tax obligation for the first quarter, and that they, therefore, are each liable for the Section 6672 penalty.

I.

Brown and Sibley were each fifty percent shareholders in Sibwin, a corporation primarily engaged in the construction and sale of homes in various localities in northern Louisiana. ² Sibley was the President and managed the corporation's daily business affairs; he signed all payroll checks and paid creditors, including the federal government. Brown was the Vice President and Secretary-Treasurer of the corporation, and was also authorized to sign corporate checks, but he did not participate in the corporation's day-to-day operations; he was principally active in the operations of his own engineering consulting business which provided services to Sibwin. Brown also helped obtain financing for Sibwin, and both he and Sibley personally guaranteed Sibwin's debts to Commercial National Bank (CNB), the principal interim financier of Sibwin projects.

In late 1971, CNB became concerned about Sibwin's operations and financial position, and it was agreed that Brown would become more active in the corporation by consulting regularly with CNB and Sibley concerning corporate decisions. When Sibwin's financial condition did not improve, a problem arose regarding the bank's continued financing of Sibwin, and, on April 10, 1972, Brown assumed exclusive control of the corporation's affairs. Sibley's authority to sign checks was rescinded, and on May 22, 1972, he resigned his office. Brown was unable to remedy Sibwin's problems; therefore, on July 30, 1972 the corporation ceased doing business.

During the period that Sibley managed the daily affairs of the company, he sometimes failed to make the periodic payments of withholding trust funds as required by Section 6302(c) of the Internal Revenue Code, 26 U.S.C. § 6302(c), and Treasury Regulation 31.6302(c)-1, and delayed in filing quarterly returns in order for Sibwin to have use of the funds for a longer period of time, even though this would entail the payment of late penalties. When Brown assumed control on April 10, no withholding taxes for the first quarter had been paid over to the government by Sibley. At this time there was $11,608.85 in Sibwin's checking account; nonetheless, no employment tax returns were filed on behalf of Sibwin and no withholding taxes were paid over to the government in 1972. After Sibwin was assessed for delinquent withholding taxes and related penalties, and payment was not made, Sibley was assessed with a § 6672 penalty in the amount of $7,665.10 for Sibwin's failure to pay withholding taxes in the first quarter of 1972, and Brown was assessed with a penalty of $12,965.59 for the corporation's failure to pay withholding taxes during the first three quarters. Brown paid the entire amount of the assessment against him and thereafter filed a claim for refund of the entire amount paid in connection with the first quarter of 1972 and for a partial refund of the amount paid for the second and third quarters. ³

The district court found Sibley liable for Sibwin's 1972 first quarter delinquency, but held that Brown was not liable because he was not a "responsible person" during that period. Judgment for $9,555.50 ⁴ was entered in favor of Brown, and for $5,525 in favor of the government against Sibley. Sibley appeals the judgment against him, and the government appeals the judgment in favor of Brown to the extent of $5,525, the amount of the first quarter penalty assessed against him.

II.

The penalty provided in Section 6672 for failure to ensure that a corporation pays its withholding taxes applies only to an individual who is " required to collect, truthfully account for, and pay over" the withheld tax, an individual known in the parlance as a "responsible person." See also 26 U.S.C. § 6671(b). At the time this case was decided by the district court, Section 6671 had been interpreted by this circuit as applying only to an officer or employee of the corporation who performed all three of the enumerated functions: collecting, accounting and paying over of withholding taxes. McCullough v. United States, 5 Cir. 1972, 462 F.2d 588, 590. Thus, if Brown's corporate office and powers, albeit unexercised, did not make him responsible before he actively took over management, the district court's decision that he was not a responsible person during the first quarter was consistent with the law as it was then understood to be, because, at the time Brown assumed personal control of Sibwin, he was not in a position to collect withholding taxes out of wages previously paid to Sibwin's employees; the withholding trust funds presumably had already been collected. See Slodov v. United States, 1978, 436 U.S. 238, 246, 98 S.Ct. 1778, 1785, 56 L.Ed.2d 251, 261-62.

Brown's position and authority may have rendered him a responsible person even during the time when Sibley was the corporation's active manager. However, we need not determine that question. In a recent case, Slodov v. United States, supra, the Supreme Court interpreted the statute to mean that every person under a duty to perform any one of the three functions enumerated in § 6671 is a responsible person and potentially liable for a § 6672 penalty. 436 U.S. at 250, 98 S.Ct. at 1787, 56 L.Ed.2d at 263. See our discussion of Slodov In Mazo v. United States, 5 Cir. 1979, 591 F.2d 1151. Because the withholding tax return for the first quarter was not due until April 30, 1972, Treas.Reg. 31.6302(c)-1(a)(1)(iv), and the withholding taxes became payable at that time, 26 U.S.C. § 6151, Brown, who assumed control on April 10, was under a duty to pay over the first quarter withholding taxes, and was, therefore, a responsible person for Sibwin during the first quarter. Under the Slodov interpretation of the statute, the district court's decision to the contrary is clearly erroneous.

Sibley also seeks to avoid being held a responsible person for the payment of the first quarter withholding taxes on the basis that, by the end of the quarter, he had no authority to pay the taxes or to order their payment. However correct the facts may be, the conclusion is faulty; Sibley was in charge of the corporation during most of the first quarter and was, therefore, under a duty to perform at least one of the functions enumerated in the statute the collection of withholding taxes out of the compensation paid to Sibwin's employees. In Slodov, the Court specifically stated that an officer or employee need not be responsible for the payment of withholding taxes at the end of the quarter in order to be a responsible person for that quarter; it noted that otherwise "the penalties easily could be evaded by changes in officials' responsibilities prior to the expiration of any quarter." 436 U.S. at 247, 98 S.Ct. at 1785, 56 L.Ed.2d at 261-62. The district court's conclusion that Sibley was a responsible person is also correct because he was under a duty to pay over withholding taxes to the government through deposits of withholding trust funds during the first quarter.

III.

A responsible person is liable for a § 6672 penalty only if he " willfully" fails to ensure that withholding taxes are paid. A voluntary, conscious, and intentional act, such as the payment of other creditors in preference to the United States, constitutes "willfulness." E. g., Liddon v. United States, 5 Cir. 1971, 448 F.2d 509, 513, Cert. denied, 1972, 406 U.S. 918, 92 S.Ct. 1769, 32 L.Ed.2d 117; Hewitt v. United States, 5 Cir. 1967,377 F.2d 921, 924. The responsible person also acts willfully if he proceeds with a reckless disregard of a known or obvious risk that trust funds may not be remitted to the government. See, e. g., Teel v. United States, 9 Cir. 1976, 529 F.2d 903, 905; Newsome v. United States, 5 Cir. 1970, 431 F.2d 742, 746; Monday v. United States, 7 Cir. 1970, 421 F.2d 1210, 1216, Cert. denied, 400 U.S. 821, 91 S.Ct. 38, 27 L.Ed.2d 48. The burden of proving lack of willfulness is on the taxpayer. E. g., Anderson v. United States, 8 Cir. 1977, 561 F.2d 162, 165; Liddon v. United States, supra.

Sibley argues that he did not "willfully" fail to pay withholding taxes because at the time the taxes became...