Dudley v. United States

• Decision Date: 12 August 1970
• Docket Number: No. 22926.,22926.
• Citation: 428 F.2d 1196
• Parties: Robert G. DUDLEY, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

428 F.2d 1196 (1970)

Robert G. DUDLEY, Appellant, v. UNITED STATES of America, Appellee.

No. 22926.

United States Court of Appeals, Ninth Circuit.

July 7, 1970.

Rehearing Denied August 12, 1970.

Francis Heisler (argued), Heisler & Stewart, Carmel, Cal., for appellant.

Stephen H. Hutzelman (argued), Johhnie Walters, Tax Division, Mitchell Rogovin, Lee A. Jackson, Elmer J. Kelsey, Dept. of Justice, Washington, D. C., James R. Browning, Jr., U. S. Atty., Barbara Ashley Phillips, Asst. U. S. Atty., San Francisco, Cal., for appellee.

Before MADDEN,^* Judge of the United States Court of Claims, KILKENNY and TRASK, Circuit Judges.

TRASK, Circuit Judge:

This is an appeal from a judgment of the District Court denying appellant's claim for refund of tax in the amount of $3734.24 collected from him by the Internal Revenue Service pursuant to 26 U.S.C. § 6672¹ and granting the United States' counterclaim in the amount of $9258.37 representing the difference between the amount of tax assessed against appellant and the amount collected. The District Court's opinion is reported at 285 F.Supp. 979 (N.D.Cal.1967).

In 1960, appellant was president and, along with his wife, principal stockholder of the Dudley Industrial Corporation, a manufacturer of ceramic bathroom fixtures with plants in Hollister and Hemet, California. The corporation failed to collect and pay over to the IRS employment and withholding taxes in the amount of $12,992.61 for the first two quarters of 1960, as required by Sections 3102 and 3402 of the Internal Revenue Code of 1954, 26 U.S.C. §§ 3102, 3402. The corporation was experiencing financial difficulties at the time. An involuntary petition in bankruptcy was filed against it on or about September 15, 1960, and it was adjudicated a bankrupt on November 27, 1961. The IRS filed a claim in bankruptcy for the taxes due, but received no payment. In 1964, the IRS assessed penalties in the amount of the taxes due against appellant as the person who was required to pay over the taxes but who willfully failed to do so, pursuant to 26 U.S.C. § 6672.

Appellant brought suit in the District Court for a refund of monies seized from him by the IRS in partial satisfaction of that assessment. His grounds were that he did not "willfully" fail to pay over the tax and that he was not the "person" required to pay over the tax.² Following non-jury trial, the District Court found that appellant was the person responsible for the payment of the taxes in question and that his failure to do so was intentional and willful within the meaning of the statute. We disagree.

This circuit has defined willfulness as used in Section 6672 to mean the "voluntary, conscious, and intentional act to prefer other creditors of the corporation over the United States." There need not be present an evil motive or intent to defraud the United States. 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). See also Turner v. United States, 423 F.2d 448, 450 (9th Cir. 1970); Pacific National Ins. Co. v. United States, 422 F.2d 26, 33 (9th Cir. 1970); United States v. Leuschner, 336 F.2d 246, 247-248 (9th Cir. 1964).³

We fail to find that appellant Dudley willfully or intentionally preferred other creditors over the United States. On May 1 or 2, 1960, he sent a check to the Internal Revenue Service in the amount of the corporation's withholding tax due for the first calendar quarter of 1960.

This check was received by IRS but for some reason never satisfactorily explained it was not presented to the bank for payment until on or about June 10, 1960. (R.T. 624-625). It was then dishonored by the drawee bank and was returned to IRS by the bank.⁴ The government's assessment of liability is based on the uncontroverted fact that checks were sent to other creditors by Dudley and were paid by the bank subsequent to the date upon which the check to IRS was dishonored. Dudley, however, testified that he was not aware that the IRS check had been dishonored until July 2, 1960, when he investigated the company's books with the aid of William F. Brower, a C.P.A. whom he had hired. Brower corroborated this testimony. It was not disputed. In the ordinary course of handling, the dishonored check would have been returned by the bank to the depositor and endorser. This would have been the IRS. Unless either the IRS or the bank notified the drawer corporation that its check had been dishonored neither the corporation nor Dudley, its president, would have known about it. There was no evidence that either the government or IRS notified the corporation or Dudley that the check had been dishonored. At this time the corporate books were in a state of disarray due to the resignation of the company's bookkeeper sometime previously. Dudley further testified that, although the corporation's checking account at the Bank of America was normally overdrawn, payment of all checks was assured by virtue of an agreement with the bank's branch manager, Richard F. O'Brien, whereby the bank would pay all overdrafts. Mr. and Mrs. Dudley personally guaranteed payment of any overdraft, and had always made good on this guarantee. O'Brien denied making any "blanket arrangement" with Dudley. He testified, however, that with respect to overdrafts, "we always managed to cover him." (R.T. 590). When asked who determined what checks were to be paid when the account was overdrawn, O'Brien testified that the bank determined that it would pay "the most important checks." (R.T. 618). O'Brien, however, admitted that, while thirty-three checks had been presented against insufficient funds from March through June, 1960, he could not point to a single one which had not ultimately been paid by the bank prior to the dishonoring of the IRS check on June 10. A check for payment of the corporation's withholding tax in the amount of $6677 for the last calendar quarter of 1959 was written by Dudley on January 31, 1960, and was honored by the bank on March 3, 1960, despite the creation of an overdraft in the amount of $1097.98.

Moreover, the bank statements of the corporation account with the Bank of America disclosed that there had been a deposit of $9500 on May 27, 1960. Likewise deposits were made in the corporation account at the American Trust Company in excess of $15,000 during May, 1960, which could have been used to pay the IRS check in question had Dudley been made aware that the check had been or was about to be dishonored. Had Dudley or the corporation received any notice that the IRS check had been or was to be dishonored the sums represented by these deposits could have been devoted to the payment of this check.

It is unclear whether O'Brien unilaterally decided to cease his apparent course of dealing — if not a "blanket arrangement" — of paying all checks, or whether he acted upon the order of D. Jersey Grut who was in the process of replacing Dudley as the responsible officer of the corporation in May and June of 1960, or whether the check was dishonored for some other reason not advanced at trial. But it is clear that Dudley had neither actual nor constructive knowledge that the check would be dishonored at the time he wrote it. On the contrary, he had every reason to believe that the bank would honor the check even if it created an overdraft.

This case is different from Bloom v. United States, 272 F.2d 215 (9th Cir. 1959), upon which appellee relies. The defendant against whom the penalty assessment was there made, knew that the taxes had not been paid and deliberately elected in the face of that knowledge to use available corporate funds to pay other creditors. Explained the court at page 222:

"Appellant\'s own testimony indicates that the corporation had funds in the bank in amounts in excess of the taxes due, but they were admittedly used to pay other bills. The record discloses that the appellant knew in January of 1948 that the taxes for the fourth quarter of 1947 were due; that they were not paid; that throughout 1948 the corporation continued to operate; that he decided to file returns without making payment of the taxes due because his attorney advised him that the returns must be filed even if the taxes due were not paid; that appellant continued to put money into the business; that he persuaded other creditors to accept debentures subordinate to taxes, expecting the business to pull out of its distress; that subsequent to the termination of the relationship with the allegedly interfering bank some corporate money was used to pay interest on the debenture bonds and to reduce the mortgage on the corporation\'s real property."

This case is akin to United States v. Leuschner, 336 F.2d 246, 248 (9th Cir. 1964), where the court held:

"The government says that, as a matter of law, Leuschner\'s conduct is within the Bloom definition of `willfully.\' As to the Yosemite taxes, we think not. The question is one of fact. (Wilson v. United States, 9 Cir., 1958, 250 F.2d 312, 325.) The evidence does not require a finding that the failure of Yosemite to pay over the withheld taxes was caused by a `voluntary, conscious, and intentional act\' of Leuschner. It would support a finding that Leuschner did not know that the taxes were not paid, and believed that they were. At most, Leuschner was negligent, which is not willfulness."

The question of willfulness is one of fact. Wilson v. United States, 250 F.2d 312, 325 (9th Cir. 1958). Here the evidence is clear that Dudley had no knowledge that the taxes were not paid. He believed that they had been paid. Dudley may have been guilty of negligence but negligence is not willfulness. We agree with appellee that the tender of a check which is dishonored by the drawee bank does not relieve the taxpayer of its liability. But where the taxpayer and its responsible official had reason to believe the check had been paid, and had not been notified to the contrary, it would under the...