Finley v. U.S., 95-3108

• Decision Date: 01 May 1996
• Docket Number: No. 95-3108,95-3108
• Parties: -2217, 96-1 USTC P 50,245, Unempl.Ins.Rep. (CCH) P 15272B Edward J. FINLEY, Plaintiff-Counterclaim-Defendant, v. UNITED STATES of America, Defendant-Counterclaim-Plaintiff-Appellee, v. Floyd JOHNSON, Counterclaim-Defendant-Appellant.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 966

82 F.3d 966

77 A.F.T.R.2d 96-2217, 96-1 USTC P 50,245,

Unempl.Ins.Rep. (CCH) P 15272B

Edward J. FINLEY, Plaintiff-Counterclaim-Defendant, v. UNITED STATES of America, Defendant-Counterclaim-Plaintiff-Appellee, v. Floyd JOHNSON, Counterclaim-Defendant-Appellant.

No. 95-3108.

United States Court of Appeals Tenth Circuit.

May 1, 1996.

On Appeal from the United States District Court for the District of Kansas (D.C. No. 91-1361-MLB).

Joseph E. McKinney (Arthur E. Palmer, with him on the briefs) of Goodell, Stratton, Edmonds & Palmer, L.L.P., Topeka, Kansas, for Counterclaim-Defendant-Appellant.

Roger E. Cole (Loretta C. Argrett, Assistant Attorney General, and Charles E. Brookhart, with him on the brief) of Department of Justice, Washington, D.C., for Defendant-Counterclaim-Plaintiff-Appellee.

Before BRORBY, BARRETT and MURPHY, Circuit Judges.

BRORBY, Circuit Judge.

This case arises out of the United States' claim under 26 U.S.C. § 6672 that Floyd Johnson was a responsible person who willfully failed to pay over payroll taxes and is therefore liable for "a penalty equal to the total amount of [the tax not paid over]"--the Internal Revenue Service's (the "IRS") so-called "100-Percent Penalty." 26 U.S.C. § 6672(a). Mr. Johnson appeals the district court's decision to set aside a jury verdict in his favor and grant the United States' motion for judgment as a matter of law under Fed.R.Civ.P. 50(b). We exercise jurisdiction under 28 U.S.C. § 1291 and affirm the district court.

I. Procedural Background

Mr. Johnson and Edward Finley were officers, directors, and shareholders of a struggling corporation named Halsey-Tevis, Inc. ("Halsey-Tevis"). Mr. Johnson served as president and chairman of the board. Mr. Finley served as secretary-treasurer. In July 1991, the I.R.S. notified both men they were being "charged a penalty under [26 U.S.C. § ] 6672 ... for failure to pay trust fund taxes as a responsible person." In both cases, the assessment equaled $144,876.48 and was for social security and income taxes Halsey-Tevis withheld from employee wages for the third and fourth quarters of 1988. Mr. Johnson and Mr. Finley each submitted partial payments of the assessments and filed timely administrative claims for refund and abatement.

After the IRS rejected Mr. Finley's claim for refund and abatement, he filed suit in the district court against the United States. The United States counterclaimed against Mr. Finley and joined Mr. Johnson as an additional defendant on the counterclaim pursuant to Fed.R.Civ.P. 13(h) and 20(a), seeking the full amounts of the assessments plus statutory interest. The government then moved for summary judgment against Mr. Finley and Mr. Johnson. The district court granted in full the United States' motion for summary judgment against Mr. Finley, concluding he was a responsible person who willfully failed to pay over payroll taxes. As for Mr. Johnson, the district court partially granted the government's motion. Though it concluded he was a responsible person and granted summary judgment on that issue, it also determined "a disputed issue of material fact exists with respect to whether [Mr.] Johnson acted willfully." The United States' claim against Mr. Johnson then proceeded to a jury trial on the sole issue of whether he acted willfully within the meaning of 26 U.S.C. § 6672. At the conclusion of the parties' cases, the jury found for Mr. Johnson by responding "YES" to the following special question:

Has the plaintiff, Floyd Johnson, shown by a preponderance of the evidence that he did not willfully fail to pay over to the United States any of the taxes withheld from the wages of Halsey-Tevis, Inc.'s employees[?]

The United States moved for judgment as a matter of law under Fed.R.Civ.P. 50(b), asking the district court to set aside the jury verdict and enter judgment for the government. The court granted the motion, finding that when it extended to Mr. Johnson all reasonable evidentiary inferences it was "firmly convinced ... a reasonable jury could not have found that [Mr.] Johnson met his burden of proof." Mr. Johnson filed a timely notice of appeal to the district court's judgment as a matter of law. He did not appeal the district court's summary judgment that he was a responsible party; therefore, the only issue before this court relates to whether Mr. Johnson acted willfully within the meaning of 26 U.S.C. § 6672.

II. Standard of Review

When reviewing a district court's grant of a motion for judgment as a matter of law under Fed. R. Civ. P. 50(b), we apply the same standard as the district court; i.e., we review de novo the district court decision. Sheets v. Salt Lake County, 45 F.3d 1383, 1387 (10th Cir.), cert. denied, --- U.S. ----, 116 S.Ct. 74, 133 L.Ed.2d 34 (1995). Judgment as a matter of law is appropriate only when "a party has been fully heard on an issue and there is no legally sufficient evidentiary basis for a reasonable jury to find for that party on that issue." Fed.R.Civ.P. 50(a)(1). We read this language to mean a court may grant the motion "only if the evidence points but one way and is susceptible to no reasonable inferences which may support the opposing party's position." Q.E.R., Inc. v. Hickerson, 880 F.2d 1178, 1180 (10th Cir.1989). Accordingly, we view the evidence in this case in favor of Mr. Johnson, extending to him the benefit of all reasonable inferences. F.D.I.C. v. United Pacific Ins. Co., 20 F.3d 1070, 1079 (10th Cir.1994). If a reasonable jury, properly considering the applicable law, could have found on the evidence presented at trial that Mr. Johnson did not willfully fail to pay over payroll taxes, then we must reverse the district court.

III. Reasonably Inferred Facts

Extending to Mr. Johnson all reasonable evidentiary inferences, we find a jury could have determined the following facts.

Halsey-Tevis, a corporation involved in the interior construction business, failed to pay over to the United States taxes it withheld from employees' wages in the third and fourth quarters of 1988. During the relevant time period, Mr. Johnson was president and a member of the board of directors of Halsey-Tevis. He also owned approximately twenty-five per cent of the corporation's shares. As president, Mr. Johnson supervised the company's sales, bidding, and construction operations. He performed these functions from Halsey-Tevis's office in Topeka, Kansas. Mr. Finley was secretary-treasurer of Halsey-Tevis and, like Mr. Johnson, served on the board of directors. Mr. Finley worked in the company's Wichita, Kansas, office and was in charge of keeping the books, arranging for financing, and preparing financial statements. These duties included keeping track of payroll and paying bills. Save for a petty cash building account in Topeka, the main accounting functions of Halsey-Tevis were performed by Mr. Finley out of the Wichita office. The company maintained its general checking and payroll accounts at First National Bank in Wichita. First National Bank also provided Halsey- Tevis a line of credit that allowed the company to borrow operating funds on the basis of its accounts receivable.

Mr. Johnson reviewed the quarterly financial reports prepared by Mr. Finley, but he had no training in reading financial statements and generally suffered from an inability to understand financial statements. Though Mr. Johnson was authorized to sign checks for Halsey-Tevis, he neither wrote nor signed any checks for the company in 1988.

Halsey-Tevis was not an especially successful corporation. Though it experienced profits for most years in the early 1980s, by the fourth quarter of 1986 it began having cash flow problems and was having trouble making timely withholding tax payments. By the end of the first quarter of 1988, a year in which the company took on some unprofitable jobs, Mr. Finley knew the company was losing money. By June 1988, the company had lost $100,000 and was delinquent in meeting its withholding tax obligations. Mr. Johnson knew the company was having "ups and downs" but was led to believe by Mr. Finley that Halsey-Tevis's financial situation was improving by July and August 1988. In fact, the third quarter of 1988 saw the company slide into insolvency (though the company did not file for protection under Title 11 until after the time period relevant to this dispute). During this quarter, Mr. Finley utilized his knowledge of the company's automated accounting system to hide from Mr. Johnson and Halsey-Tevis's other directors that he was not paying over withholding taxes. Essentially, he would cut checks for the withholding taxes but then hold on to checks and not negotiate them. Because of the way the company's automated accounting system worked, this practice allowed Mr. Finley to reduce the perceived amount owed on the payroll tax account without actually paying over the money. Even a person with financial training would have had difficulty discerning Halsey-Tevis was having trouble meeting its withholding responsibilities.

Mr. Johnson first learned of the delinquent payroll taxes in a telephone conversation he had with Mr. Finley "in the latter part of October" 1988. According to Mr. Johnson, he and Mr. Finley "were talking about something else and I asked him if the taxes had been paid and [he said] they had not." Mr. Johnson then told Mr. Finley, "They have to be paid." Mr. Finley responded that partial payments were coming in and made no indications to Mr. Johnson the withholding taxes would not be paid over. At this point, Mr. Johnson made no further inquiries and took no other action with respect to the unpaid withholding taxes. At approximately this same time--the end of October 1988--Mr. Finley was finishing his preparation of Halsey-Tevis's quarterly financial statement for the period ending September 30, 1988.

On Monday, November 7, 1988, Mr. Finley contacted Halsey-Tevis's banker at First National Bank and explained that the...