Emshwiller v. U.S.

• Decision Date: 13 December 1977
• Docket Number: No. 77-1035,77-1035
• Citation: 565 F.2d 1042
• Parties: 77-2 USTC P 9744 John P. EMSHWILLER, Jr., Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1042

565 F.2d 1042

77-2 USTC P 9744

John P. EMSHWILLER, Jr., Appellant, v. UNITED STATES of America, Appellee.

No. 77-1035.

United States Court of Appeals,

Eighth Circuit.

Submitted Oct. 11, 1977.

Decided Nov. 17, 1977.

Rehearing and Rehearing En Banc Denied Dec. 13, 1977.

William H. Coates, Abrahams, Kaslow & Cassman, Omaha, Neb., on brief for appellant.

Aaron P. Rosenfeld, Atty., Tax Div., Dept. of Justice, Washington, D.C., for appellee; Myron C. Baum, Acting Asst. Atty. Gen., Gilbert E. Andrews and Richard W. Perkins, Dept. of Justice, Washington, D.C., and Daniel E. Wherry, Omaha, Neb., on brief.

Before LAY, HEANEY and ROSS, Circuit Judges.

ROSS, Circuit Judge.

In this case Emshwiller (hereinafter taxpayer) sued for a tax refund and a jury returned a verdict in his favor. The trial court then granted the government's motion for judgment notwithstanding the verdict, both as to taxpayer's claim and on the government's counterclaim for the unpaid balance of the penalty assessed against the taxpayer under 26 U.S.C. § 6672. We affirm the judgment of the district court regarding liability but find that the record compels a further reduction in the total amount of tax owed.

Engineering Products Corporation, under the direction of its sole shareholder Milton Katelman, was in serious financial trouble. The taxpayer, John P. Emshwiller, Jr., was hired in December of 1970 to help straighten out the company's financial affairs. However, conditions worsened and on September 24, 1971, the company filed a petition for an arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C. § 701, et seq. On the same date the bankruptcy court entered an order authorizing the debtor to remain in possession of its property and to continue operating its business. This order specifically required the debtor

to segregate and hold apart from all other funds all money withheld from employees or collected from others for taxes under any law of the United States * * * and deposit in a separate bank account the money so withheld or collected.

Milton Katelman continued to manage the corporation's business until his death on March 27, 1972. The company's board of directors did not elect a general manager to succeed Katelman; however, three individuals including Emshwiller had authority, acting jointly with one of the other two individuals, to draw on the funds of the corporation. In June of 1972 the bankruptcy court appointed Emshwiller and George Sevick to act as co-managers of the corporation. Emshwiller continued to act in this capacity until December 26, 1973, when a receiver was appointed. ¹

On December 8, 1972, an amended plan of arrangement was confirmed by the bankruptcy court, which plan made the following provisions for payment of debts owed by the corporation to the United States:

The corporation's debts were divided into six classes Class 4 debts consisted of income, employment, withholding and social security (FICA) taxes accruing since the filing of the Chapter XI petition on September 24, 1971; Class 3 debts consisted of similar taxes accruing prior to the filing of the petition.

An order of priority for satisfaction of these debts was established

Class 4 debts were to be paid in full upon confirmation of the plan of arrangement;

Class 3 debts were to be satisfied thereafter in accordance with a schedule of twelve monthly payments;

Future withholding and FICA taxes were to be paid as they became due.

From the death of Mr. Katelman until it was placed into receivership, the corporation continued in the normal operation of its business, including making payments of net wages to employees. However, even though specifically advised by the Internal Revenue Service to do so, no funds were segregated and placed in a separate bank account to provide for employee withholding and FICA taxes during this period. As a result the corporation was unable to meet all of its current obligations to pay over these taxes to the government as they became due and was also unable to pay all of its Class 4 debts upon confirmation of the plan of arrangement.

On November 18, 1974, the Internal Revenue Service (IRS) assessed a penalty against the taxpayer Emshwiller personally under 26 U.S.C. § 6672 in the amount of $12,807.52 for unpaid employee withholding and FICA taxes due for the second and third quarters of 1972 and the third and fourth quarters of 1973. Emshwiller made a token payment of $100, then commenced the instant suit for a refund. The government counterclaimed for the unpaid balance of its assessment. ²

Following trial the case was submitted to the jury in the form of two questions: (1) whether Emshwiller was a person responsible for the actions of the corporation during the quarters in question, and (2) whether Emshwiller had willfully failed to pay over the claimed taxes when due. The jury answered the first question in the affirmative and the second in the negative; the district court then entered an order overruling the government's motions for directed verdict and accepting the verdict rendered by the jury. Thereafter, the government moved for judgment n. o. v. and the same was granted. The taxpayer then filed this appeal.

I. Liability.

Employers are required to withhold FICA and federal income taxes from employee wages and pay the amounts so withheld to the government on a quarterly basis in conjunction with IRS form 941. ³ Under the provisions of 26 U.S.C. § 7501, wages withheld from employees are deemed to be held in trust for the benefit of the United States and the employees in question are given credit for the amount of the withholdings regardless of whether the employer ever in fact pays the money to the government as required. Consequently, any failure by the employer to pay withheld taxes results in a loss to the government in that amount. See United States v. Paulton, 540 F.2d 886, 888 (8th Cir. 1976); Hartman v. United States, 538 F.2d 1336, 1339-40 (8th Cir. 1976); Kelly v. Lethert, 362 F.2d 629, 633 (8th Cir. 1966). To lessen the likelihood of such losses Congress enacted 26 U.S.C. § 6672, which provides:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax * * * shall * * * be liable to a penalty equal to the amount of the tax evaded, or not collected, or not accounted for and paid over. * * *

Though termed a "penalty," the liability imposed by section 6672 is civil in nature and is designed to provide the government a means by which to collect directly from the employer those taxes which the employer withheld and should have accounted for and paid over. Hartman v. United States, supra, 538 F.2d at 1340; Kelly v. Lethert, supra, 362 F.2d at 633. Under the terms of the statute, liability results from the coincidence of three factors: (1) There must be a "person" who (2) is required to collect, truthfully account for and pay over taxes, but who (3) "willfully" fails to do so.

The first two of these elements are embodied in the concept of a "responsible person." Where, as here, a corporate employer is involved, a responsible person is an officer or employee of the corporation who has "significant, albeit not necessarily exclusive, authority in the field of corporate decision-making and action where taxes due the federal government are concerned; but he need not be an actual disbursing officer." Hartman v. United States, supra, 538 F.2d at 1340. In this case the jury found Emshwiller to be a responsible person for the period commencing from the death of Milton Katelman on March 27, 1972, until the appointment of a receiver on December 26, 1973. Emshwiller does not dispute this finding; nor does the government seek to impose liability for any prior period. The issue in this case is whether Emshwiller willfully failed to pay over withheld taxes when due. The district court concluded that he had as a matter of law. We agree.

To be willful within the meaning of the statute, conduct need not be the product of an evil or spiteful motive. It is enough that a failure to pay taxes is the result of a deliberate or conscious choice. Hartman v. United States, supra, 538 F.2d at 1341. On the record before us it is clear that Emshwiller paid employees net wages knowing that funds were not then available to the corporation to make payment to the government of the wages withheld. It is likewise clear that no such contemporaneous payment was made for three of the quarters in question. ⁴ Emshwiller insists that he had no choice in failing to make these payments because the corporation's funds were made available to it only after the payment of other creditors under a trust arrangement between the corporation and the First National Bank of Council Bluffs, Iowa. However,...