Finley v. U.S.
| Decision Date | 20 August 1997 |
| Docket Number | No. 95-3108,95-3108 |
| Parties | -6321, 97-2 USTC P 50,613, Unempl.Ins.Rep. (CCH) P 15764B, 97 CJ C.A.R. 1681 Edward J. FINLEY, Plaintiff and Counterclaim Defendant, v. UNITED STATES of America, Defendant and Counterclaim Plaintiff-Appellee, Floyd Johnson, Counterclaim Defendant-Appellant. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Ernest J. Brown (Loretta C. Argrett, Charles E. Brookhart, and Roger E. Cole, Department of Justice, and Of Counsel, Randall K. Rathbun, Office of the United States Attorney, with him on the briefs), Department of Justice, Washington, DC, for Defendant and Counterclaim Plaintiff-Appellee.
Joseph E. McKinney (Arthur E. Palmer, with him on the briefs) of Goodell, Stratton, Edmonds & Palmer, L.L.P., Topeka, KS, for Counterclaim Defendant-Appellant.
Before SEYMOUR, PORFILIO, ANDERSON, TACHA, BALDOCK, BRORBY, EBEL, KELLY, HENRY, BRISCOE, LUCERO and MURPHY, Circuit Judges.
We reheard this appeal en banc to address the following question:
Under 26 U.S.C. § 6672, if a responsible person fails to investigate or correct mismanagement after learning of a withholding tax delinquency, must his conduct be found reckless and therefore willful as a matter of law, or, in the alternative, should the jury, in the view of all relevant evidence, be entitled to find the responsible person did not act recklessly?
We hold "willful" conduct as defined in the context of 26 U.S.C. § 6672 (1994 & Supp.1977) can be negated by a showing the responsible person had reasonable cause for failing to pay withholding taxes held in trust for the government. Such conclusion appropriately avoids a "strict liability" interpretation of § 6672 and preserves a role for the jury, as fact finder, to determine whether, in the view of all relevant evidence, a responsible person "willfully" failed to pay employee withholding taxes.
Appellant, Mr. Floyd Johnson, was president and a member of the board of directors of Halsey-Tevis, Inc. ("Halsey-Tevis"), a struggling corporation engaged in the interior construction business. In late October 1988, Mr. Johnson learned from board member and secretary-treasurer, Mr. Edward Finley, that Halsey-Tevis was delinquent in paying federal social security and income taxes withheld from employee wages during the third and fourth quarters of 1988. Upon learning of the delinquency, Mr. Johnson told Mr. Finley, "[t]hey have to be paid." Mr. Finley responded that partial payments were coming in; he gave no indication he would not comply with Mr. Johnson's directive to pay the taxes. Mr. Johnson made no further inquiry and took no further action regarding the unpaid withholding taxes even though he had authority to sign company checks and, at that time, Halsey-Tevis had access to funds that could have been used to make at least partial payment to the government.
The full extent of Halsey-Tevis' financial woes became evident a short time later when Mr. Finley completed the company's quarterly financial statement for the period ending September 30, 1988. On November 7, 1988, Mr. Finley contacted First National Bank in Wichita--the bank at which Halsey-Tevis maintained its general checking and payroll accounts and that provided Halsey-Tevis a line of credit from which the company could borrow operating funds based on its accounts receivable--to explain the newly completed quarterly statement. After reviewing the statement, the bank called a meeting of the Halsey-Tevis officers for the next day. On the morning of November 8, Mr. Finley, Mr. Johnson and another Halsey-Tevis officer, Mr. Brian McCann, met to discuss the company's financial problems prior to meeting with the bankers. It was at this meeting Mr. Johnson learned Mr. Finley had not remedied the withholding tax delinquency. Prior to meeting with the bankers, Mr. Johnson, Mr. Finley and Mr. McCann went to the local Small Business Administration office to try and secure a loan that would allow them to pay the withholding taxes. The Small Business Administration told the Halsey-Tevis officers they would have to go through a bank. Later that same day, First National Bank froze Halsey-Tevis' accounts. Thereafter, Halsey-Tevis could not pay any bills without the bank's prior approval.
On November 14, 1988, Mr. Johnson and Mr. Finley delivered about $105,000 in collections to the bank and asked bank officials to apply the deposit to the withholding tax balance. The bank refused and instead applied the deposit to Halsey-Tevis' loan indebtedness. Bank officials told Mr. Johnson and Mr. Finley they would "take care of the taxes later."
In July 1991, the Internal Revenue Service notified Mr. Johnson he was being assessed a $144,876.48 penalty under 26 U.S.C. § 6672. The government's claim against Mr. Johnson proceeded to a jury trial in 1994 on the sole issue of whether he acted willfully within the context of § 6672. When asked whether Mr. Johnson had "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 jury responded "YES." This verdict was not allowed to stand, however. The district court granted the government's post-trial motion for a judgment as a matter of law under Fed.R.Civ.P. 50(b), concluding "a reasonable jury could not have found that [Mr.] Johnson met his burden of proof." Applying Denbo v. United States, 988 F.2d 1029 (10th Cir.1993), a panel of this court affirmed the district court's decision to set aside the jury verdict. Finley, 82 F.3d at 972-74.
The Internal Revenue Code requires employers to withhold federal social security and income taxes from their employees' wages and then pay those taxes over to the government. 26 U.S.C. §§ 3102(a), 3402(a), 3403 (1994 & Supp. 1997). The funds withheld from employee wages do not belong to the employer/corporation; they are funds held by the employer in trust for the government. 26 U.S.C. § 7501(a) (1994). A corporate officer or employee who fails to remit such taxes to the government may be personally liable for penalties pursuant to 26 U.S.C. § 6672(a), 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, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.
(Emphasis added.)
It is well-settled § 6672 liability does not depend on the presence of a bad motive or the specific intent to defraud the government--elements associated with criminal liability. Burden v. United States, 486 F.2d 302, 304 (10th Cir.1973), cert. denied, 416 U.S. 904, 94 S.Ct. 1608, 40 L.Ed.2d 109 (1974); Bowen v. United States, 836 F.2d 965, 967-68 (5th Cir.1988); Bloom v. United States, 272 F.2d 215, 223-24 (9th Cir.1959), cert. denied, 363 U.S. 803, 80 S.Ct. 1236, 4 L.Ed.2d 1146 (1960). Rather "willfulness" for purposes of imposing civil liability under § 6672 is
a "voluntary, conscious and intentional decision to prefer other creditors over the Government...." Although negligence does not give rise to section 6672 liability, " ' the willfulness requirement is ... met if the responsible officer shows a "reckless disregard of a known or obvious risk that trust funds may not be remitted to the government...." ' " A responsible person's failure to investigate or to correct mismanagement after being notified that withholding taxes have not been paid satisfies the section 6672 willfulness requirement.
Denbo, 988 F.2d at 1033 (citations omitted). The question posed in this en banc appeal is whether evidence satisfying the Denbo definition alone is sufficient to impose liability under § 6672, as a matter of law, or whether there remains some role for a jury to determine, in view of all relevant evidence, that a responsible person did not act willfully and therefore cannot be held liable for a corporation's unpaid withholding taxes.
The government responds to this question by citing us to case law from this circuit and others that holds a responsible person who has knowledge of unpaid taxes and thereafter personally pays or directs the payment of claims of other creditors, or fails to take appropriate steps to ensure the taxes are paid (e.g., fails to investigate the matter or correct mismanagement), is willful as a matter of law. According to the government, to stray from this precedent "would largely emasculate Section 6672 and provide a blueprint for the avoidance of personal liability for those persons responsible for the failure to pay over trust fund taxes due the United States."
We are fully aware of the precedent whereby courts have seized on the notion that certain factual paradigms establish willfulness as a matter of law, even though the facts do not involve an intentional failure to pay over withholding taxes to the government. A responsible person's failure to investigate the problem or correct mismanagement after receiving actual notice of a withholding tax delinquency represents the factual paradigm applied in this case. Finley, 82 F.3d at 973; see also, Denbo, 988 F.2d at 1033-34. Reliance upon the representation of someone in control of company finances that withholding taxes will be paid after learning that such taxes are delinquent, and when it is known that the person making the statements is unreliable and has inadequately performed his financial responsibilities in the past, represents another paradigm used to impose liability under § 6672 as a matter of law. The payment of other bills with knowledge that the...
To continue reading
Request your trial
-
Southern Ute Indian Tribe v. Amoco Production Co.
...See United States v. American Trucking Ass'ns., 310 U.S. 534, 543, 60 S.Ct. 1059, 84 L.Ed. 1345 (1940); Finley v. United States, 123 F.3d 1342, 1347 (10th Cir.1997) (en banc). Therefore, perhaps the most basic rule of statutory construction is that when the language of a statute has a reaso......
-
In re Sorrells
...United States v. Nordic Village, Inc., 503 U.S. 30, 36, 112 S.Ct. 1011, 1015-16, 117 L.Ed.2d 181 (1992), cited in Finley v. United States, 123 F.3d 1342, 1347 (10th Cir.1997) (same); Trierweiler v. Croxton & Trench Holding Corp., 90 F.3d 1523, 1532 (10th Cir. 1996) (expressing policy of dis......
-
Fish v. Kobach
...so read—fails to give independent “operative effect” to the diverse language used in the two subparagraphs. See Finley v. United States , 123 F.3d 1342, 1347 (10th Cir. 1997). The reading of the statute that we adopt has the beneficial effect of avoiding this outcome: under it, subparagraph......
-
Morrison Knudsen Corp. v. Fireman's Fund Ins. Co.
...require that GIT have a chance on remand to comply with that dictate, rather than have its claim barred. Cf. Finley v. United States, 123 F.3d 1342, 1349 (10th Cir.1997) (holding that, because trial court granted plaintiff JMOL based on erroneous legal assumption that certain defense was no......
-
TAX VIOLATIONS
...the amount of such taxes in such account until payment over to the United States.” I.R. C. § 7512(b). 175. Cf. Finley v. United States, 123 F.3d 1342, 1334–35 (10th Cir. 1997) (stating that identifying a responsible person is one element in establishing personal liability for failure to pay......
-
Taxation
...is still liable for the 100% penalty. McCullough v. United States , 462 F.2d 588 (5th Cir. 1972). But see Finley v. United States , 123 F.3d 1342 (10th Cir. 1997) for a possible contrary approach where the taxpayer made reasonable efforts to protect trust funds but was frustrated by circums......
-
Tax Violations
...the amount of such taxes in such account until payment over to the United States.” I.R.C. § 7512(b). 177. Cf. Finley v. United States, 123 F.3d 1342, 1334–35 (10th Cir. 1997) (stating that identifying a responsible person is one element in establishing personal liability for failure to pay ......