Cline v. U.S., 92-1139

• Decision Date: 29 June 1993
• Docket Number: No. 92-1139,92-1139
• Citation: 997 F.2d 191
• Parties: -5230, 93-2 USTC P 50,403, Unempl.Ins.Rep. (CCH) P 17422A Boyd L. CLINE, Plaintiff and Counterclaim Defendant-Appellee, v. UNITED STATES of America, Defendant and Counterclaim Plaintiff-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 191

997 F.2d 191

72 A.F.T.R.2d 93-5230, 93-2 USTC P 50,403,

Unempl.Ins.Rep. (CCH) P 17422A

Boyd L. CLINE, Plaintiff and Counterclaim Defendant-Appellee, v. UNITED STATES of America, Defendant and Counterclaim Plaintiff-Appellant.

No. 92-1139.

United States Court of Appeals Sixth Circuit.

Argued March 11, 1993.

Decided June 29, 1993.

Keith M. Aretha and Neill T. Riddell (argued and briefed), Eames, Wilcox, Mastej, Bryant, Swift & Riddell, Detroit, MI, for Boyd L. Cline, plaintiff-appellee.

Francis L. Zebot, Asst. U.S. Atty., Office of the U.S. Atty., Detroit, MI; Stephen T. Lyons, Trial Atty., U.S. Dept. of Justice, Tax Div.; Gary R. Allen, Acting Chief (briefed), Richard Farber, Kevin M. Brown and Sally Schornstheimer (argued), U.S. Dept. of Justice, Appellate Section Tax Div., Washington, D.C., for the U.S., defendant-appellant.

Before: JONES and GUY, Circuit Judges; and LIVELY, Senior Circuit Judge.

LIVELY, Senior Circuit Judge.

In this case the Internal Revenue Service (IRS) assessed three officers of a corporation for the amount of employee income taxes and the employee portion of social security taxes that the corporation had withheld from employees' wages but had failed to pay over to the government. Section 6672 of the Internal Revenue Code of 1954 (the Code), 26 U.S.C. § 6672, imposes a "penalty" equal in amount to the unremitted taxes upon responsible persons who willfully fail "to collect ..., or truthfully account for and pay over" any tax imposed by the Code.

The three corporate officers paid a portion of the assessed amounts and sued the United States for refunds. The government then filed counterclaims against each of the plaintiffs, demanding payment of the total assessment against each. The three cases were consolidated for trial by a jury. In response to interrogatories the jury found that two of the plaintiffs were responsible persons within the court's instructions and that they had acted willfully in failing to account for and pay over the withheld taxes. This appeal does not concern these jury findings.

The jury rendered a different verdict in Cline's case. The assessment against Cline was for the amount of taxes withheld in the third and fourth quarters of 1984 and the first quarter of 1985. The jury found that Cline was not a responsible person for the third and fourth quarters of 1984, but was a responsible person for the first quarter of 1985. However, the jury found further that Cline did not act willfully in failing to pay over the taxes withheld in that quarter. On the basis of the verdict, the district court entered judgment ordering the government to refund to Cline the amount he had paid, with interest, and dismissing the counterclaim for the entire assessed amount.

The government did not contest the finding that Cline was not a responsible person during the last two quarters of 1984. It filed a motion for judgment notwithstanding the verdict (JNOV), however, arguing the evidence showed that Cline's failure to pay the taxes or cause them to be paid after he became a responsible person who knew of the delinquencies established his willfulness as a matter of law. The district court denied the motion, concluding that "there was sufficient evidence to raise a question of fact regarding Mr. Cline's willfulness."

The government appeals from the judgment and the denial of its JNOV motion.

I.

The three officers were employed by Michigan Transportation Company (MTC). MTC was a trucking company that handled specialized loads, such as volatile chemicals. Ralph Posnik was the President and sole shareholder of MTC. Cline was hired by MTC in 1968 and became Vice-President of Maintenance in 1974 or 1975. In 1977, he became Executive Vice-President of the company. As Executive Vice-President, Cline was second in command at MTC. Cline's duties were supervising operation of the garage and maintenance of the equipment, ordering supplies and equipment, negotiating maintenance contracts and hiring and firing maintenance personnel. He testified that his authority was limited to maintenance operations. This involved "seeing to it that the equipment was ready and rolling down the highway." Cline reviewed bills for equipment and supplies that he had ordered, initialed them and sent them to the "front office" for payment. Cline testified that his initialling an invoice was never intended or understood as a direction to another to make payment. Edward Bedikian was MTC's controller from 1978 to January 24, 1985.

Posnik, Bedikian and Cline were the three individuals assessed by the government. Testimony indicated that Bedikian was primarily responsible for financial and tax matters at MTC and reported directly to Posnik. There was considerable evidence that Posnik was the final authority as to any important decisions, and no one else at MTC possessed independent decisionmaking authority. There was conflicting testimony whether only Posnik or whether Cline and Bedikian also had decisionmaking authority as to which bills would be paid. Bedikian was not replaced following his resignation in January 1985, and several MTC employees other than Cline took over his duties.

In the early 1980s, MTC began having financial difficulties and stopped remitting the taxes it had withheld from its employees. The IRS and MTC entered an installment agreement through which delinquent withholding taxes for 1983 were eventually paid. MTC however continued to fall behind on the payment of some of the taxes for the third and fourth quarters of 1984, the first and second quarters of 1985 and the first quarter of 1986. Cline first became aware of these tax liabilities in June of 1984. The company's financial difficulties, including the delinquent taxes were discussed at weekly luncheon meetings attended by Posnik, Cline, Bedikian and McCleod, MTC's Vice-President of Traffic and Sales. In addition, Cline saw financial statements of MTC that were prepared quarterly and which reflected the unpaid withholding tax liabilities. Cline testified that he knew the unpaid taxes on the financial statements indicated that "something had to be paid to the IRS." Cline also sat in on some meetings with the company's attorney where the obligation for taxes was discussed.

During 1984 and 1985, all checks issued by MTC were signed using a mechanical check-signing machine. Until February 22, 1985, the only person authorized to sign checks on MTC's accounts was Shirley Posnik, Ralph Posnik's wife. Shirley Posnik was removed as signatory, and Ralph Posnik, Cline and McCleod were made signatories on February 22, 1985. Cline testified he was not permitted to write a check without authorization from Posnik; Posnik testified Cline could have written a check without Posnik's authorization. Cline further testified that he never utilized his authority, but Posnik testified that either Bedikian or Cline must have paid some of the bills for supplies or utilities because "the fuel was running" and "the tires were moving." The check-writing machine was kept under lock and key controlled by Doris Wagner, Posnik's secretary.

Around February 22, 1985, Cline became aware that company officials were meeting with the IRS regarding MTC's liabilities, and he attended one meeting with the IRS. MTC continued to pay net wages to its employees and continued paying some of its bills until it filed for bankruptcy on May 31, 1985. There was substantial testimony that MTC was operating "hand-to-mouth" in late 1984 and early 1985 with Posnik insisting upon meeting payroll first and then, as cash came to MTC in the daily mail, paying those creditors who were pressing MTC the most. During the time Cline knew MTC was not paying withholding taxes, Cline continued to order fuel and other supplies for the garage facilities, some on a COD basis. He testified, however, that he could not order even a single tire without Posnik's approval.

In March of 1985, at Posnik's direction Cline went to Rally Transport, another company owned by Posnik, to reorganize and shut down the company. He retained his duties at MTC during this time, but received his paycheck from Rally. On May 21, 1985, Cline suffered a heart attack and never returned to work at Rally or MTC.

II.

A.

Sections 3102 and 3402 of the Code, 26 U.S.C. §§ 3102 and 3402, require employers to withhold social security and income taxes imposed on employees from the employees' wages. The withheld taxes are part of the wages of an employee and are held in trust for the benefit of the United States. 26 U.S.C. § 7501 ("a special fund in trust for the United States"); Slodov v. United States, 436 U.S. 238, 243, 98 S.Ct. 1778, 1783, 56 L.Ed.2d 251 (1978). Thus, those funds may not be used as working capital for the business. Id.; McGlothin v. United States, 720 F.2d 6, 8 (6th Cir.1983). An employee whose taxes are withheld but not actually paid over to the government is credited with payment. Slodov, 436 U.S. at 243, 98 S.Ct. at 1783. Therefore, the government has recourse against the persons responsible for remitting the taxes to the IRS. Id. Section 6672 provides that when a "responsible person," the person charged with collecting, accounting for and paying over withholding taxes, "willfully" fails to do so, he is liable for a penalty equal to the amount of the unpaid taxes. McGlothin, 720 F.2d at 8. If an assessment is made against a corporate officer, the burden of proof by a preponderance of the evidence is on the officer to show that he was not a responsible person or that he did not act willfully. Calderone v. United States, 799 F.2d 254, 258 (6th Cir.1986) (quoting Sinder v. United States, 655 F.2d 729, 731 (6th Cir.1981)).

B.

We are concerned only with the issue of willfulness. The government did not appeal from the jury's finding that Cline was not a responsible party with respect to the last two quarters of 1984. Because the final judgment was not adverse to Cline, he could not appeal from the finding...