Honey v. U.S.

• Decision Date: 07 May 1992
• Docket Number: No. 91-1782,91-1782
• Citation: 963 F.2d 1083
• Parties: -1333, 92-1 USTC P 50,253, 18 UCC Rep.Serv.2d 618, Unempl.Ins.Rep. (CCH) P 16641A Charles L. HONEY, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant. UNITED STATES of America, Counterclaimant-Appellant, v. Charles L. HONEY and James W. Meador, Counterdefendants-Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 1083

963 F.2d 1083

69 A.F.T.R.2d 92-1333, 92-1 USTC P 50,253,

18 UCC Rep.Serv.2d 618,

Unempl.Ins.Rep. (CCH) P 16641A

Charles L. HONEY, Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

UNITED STATES of America, Counterclaimant-Appellant, v. Charles L. HONEY and James W. Meador, Counterdefendants-Appellees.

No. 91-1782.

United States Court of Appeals Eighth Circuit.

Submitted Dec. 9, 1991.

Decided May 7, 1992.

Bridget N. Rowan, Washington, D.C., argued (Gary R. Allen and Richard Farber, on the brief), for defendant-appellant.

Eugene G. Sayre, argued, Curtis Bowman and Philip Miron, Plastiras, Hyden & Miron, Little Rock, Ark., for plaintiff-appellee Honey.

Barry D. Barber, McKenzie, McRae & Vasser, Prescott, Ark., for counterdefendant-appellee Meador.

Before LAY, ^* Chief Judge, WOLLMAN and HANSEN, Circuit Judges.

HANSEN, Circuit Judge.

Appellant United States of America, on behalf of the Internal Revenue Service (IRS), appeals from an order and judgment of the district court regarding appellees Charles L. Honey (Honey) and James W. Meador's (Meador) (collectively "taxpayers") liability under 26 U.S.C. § 6672 (1986), for withholding taxes unremitted by Phoenix Housing Systems, Inc. (Phoenix). We reverse.

I. BACKGROUND

Phoenix was incorporated on November 27, 1984, by Honey, Charles White (White), and F. Peter Lee (Lee). Lee, the president and chief executive officer, was responsible for the day-to-day operations of Phoenix. Honey was named vice-president and secretary/treasurer but had few responsibilities other than as legal counsel. White was the bookkeeper for Phoenix. In April of 1985, Meador was hired by Phoenix as vice-president of finance. During the entirety of its existence, Phoenix did not remit any withheld Federal Insurance Contributions Act (FICA) or income taxes to the IRS as required by 26 U.S.C. §§ 3102 and 3402 (collectively "employment taxes").

In late October of 1985, Lee disappeared, and Meador took over the day-to-day operations of Phoenix. Meador discovered in early November that the withheld employment taxes had not been remitted to the IRS. Meador informed Honey that the taxes had not been remitted. ¹ The decision was made either by Honey and Meador or by Meador alone with knowledge on Honey's part to pay Phoenix's employees, suppliers, and other general creditors in an effort to continue operations while they sought an investor to purchase Phoenix. ² Between November 1, 1985, and late December 1985, approximately $114,000 was disbursed from Phoenix's general corporate account with the First National Bank of Hope to pay employees, suppliers, and other general creditors. Approximately the same amount was deposited into Phoenix's account during this period. The corporation's short life ended in late December 1985, when two of Phoenix's lenders seized the corporation's assets.

On June 20, 1988, the IRS assessed Honey, Meador, and Lee for $112,375.49 in unpaid employment taxes for the second, third, and fourth quarters of 1985. Honey paid a portion of the assessed taxes and filed a claim with the IRS for refund and abatement. The IRS disallowed Honey's claim and Honey commenced this suit. The United States countersued Honey, Meador, and Lee for the unpaid portion of the assessment. Lee was subsequently dismissed due to the inability of the United States to obtain service of process.

In order to be personally liable under § 6672 for unpaid employment taxes, a person must be considered "responsible" and must have willfully failed to collect or pay over the taxes. See Olsen v. United States, 952 F.2d 236, 239 (8th Cir.1991); Kizzier v. United States, 598 F.2d 1128, 1132 (8th Cir.1979). Answering interrogatories, the jury found that Honey and Meador were responsible persons for the entirety of the assessed period but had acted willfully only after October 31, 1985. No appeal is taken from the jury's findings.

By agreement, the parties reserved for the court the question of whether Phoenix had any "unencumbered funds" available after October 31, 1985, to pay the taxes collected and due prior to that date. The trial court noted that if unencumbered funds were available to Phoenix after October 31, 1985, and were not used to pay the tax deficiency which accrued prior to that date, then Honey and Meador, as responsible persons prior to that date, are personally liable for the tax deficiency to the extent of the unencumbered funds. See Kizzier, 598 F.2d at 1134; Mazo v. United States, 591 F.2d 1151, 1154 (5th Cir.), cert. denied, 444 U.S. 842, 100 S.Ct. 82, 62 L.Ed.2d 54 (1979). The trial judge determined that no unencumbered funds were available after October 31, 1985. The United States appeals from the trial judge's ruling that Phoenix had no unencumbered funds after October 31, 1985.

Appellees do not contest their liability for $13,161.10 in employment taxes collected but unremitted during November and December of 1985, and do not appeal from the district court's entry of judgment against them for the unpaid portion of those taxes.

II. DISCUSSION

A. GENERALLY

An employer is required to withhold FICA and federal income taxes from its employees' wages. 26 U.S.C. §§ 3102, 3402. Those collected taxes constitute a trust in the hands of the employer. 26 U.S.C. § 7501. The Internal Revenue Code 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.

26 U.S.C. § 6672(a) (1986).

"A responsible person acts willfully within the meaning of § 6672 whenever he 'acts or fails to act consciously and voluntarily and with knowledge or intent that as a result of his action or inaction trust funds belonging to the government will not be paid over but will be used for other purposes,' ... [or] by proceeding with a 'reckless disregard of a known or obvious risk that trust funds may not be remitted to the government.' " Olsen, 952 F.2d at 240 (citations omitted). "The term willfully does not connote a bad or evil motive, but rather means a voluntary, conscious, and intentional act, such as the payment of other creditors in preference to the United States." Elmore v. United States, 843 F.2d 1128, 1132 (8th Cir.1988).

The parties dispute whether the trial court placed the burden on the United States to prove that unencumbered funds were available or placed the burden on the taxpayers to prove that all funds available were encumbered. The failure to use unencumbered funds to satisfy a preexisting employment tax liability is part of being willful. Although willfulness is usually a question of fact, "[e]vidence that the responsible person had knowledge of payments to other creditors, including employees, after he was aware of the failure to pay over withholding taxes is proof of willfulness as a matter of law." Olsen, 952 F.2d at 240 (citations omitted). See also Hochstein v. United States, 900 F.2d 543, 548 (2d Cir.1990). Once the IRS makes an assessment of liability, the taxpayer bears the burdens of production and persuasion as to all issues, including the lack of willfulness. Ruth v. United States, 823 F.2d 1091, 1093 (7th Cir.1987) (citing cases); Anderson v. United States, 561 F.2d 162, 165 (8th Cir.1977). Thus, the taxpayer has the burden to prove that all potentially available funds were encumbered. Cf. Mazo, 591 F.2d at 1156 n. 2 ("The taxpayers neither alleged nor offered any evidence that these funds [in the bank account] were encumbered or otherwise restricted so that they were unavailable for payment of withholding taxes.").

During the trial, the district court noted on several occasions that the burden of proof, including the burden "to show that funds were not available," was on the taxpayers. Although not explicit in the written order, we find that the trial court did place the burden on the taxpayers to prove that the available funds were encumbered.

The district court's conclusion that no unencumbered funds existed is a mixed question of law and fact. The definition of "unencumbered" is a legal issue subject to de novo determination. The factual question is whether any funds meeting that definition existed. As will be discussed, under the facts of this case, we conclude as a matter of law that Phoenix had adequate unencumbered funds after October 31 1985, to satisfy the tax obligation which had accrued prior to October 31, 1985.

B. THE RELATIONSHIP BETWEEN BEING A "RESPONSIBLE PERSON," BEING "WILLFUL," AND UNENCUMBERED FUNDS

The taxpayers argue that they are liable only to the extent of the unencumbered funds in existence on October 31, 1985 and not for any funds acquired by Phoenix after October 31, 1985. However, the taxpayers have not challenged the district court's ruling against them on this issue by filing a cross-appeal. We discuss this issue solely for the purpose of lending meaning to our later discussion of the definition of "unencumbered funds" under the facts of this case.

The taxpayers cite to Slodov v. United States, 436 U.S. 238, 98 S.Ct. 1778, 56 L.Ed.2d 251 (1978), wherein the United States Supreme Court rejected the government's argument that a trust to pay the preexisting tax liabilities was imposed on all cash received by the corporations after a taxpayer assumes control of a corporation and becomes both responsible and willful.

[A] "responsible person" under § 6672 may violate the "pay over" requirement of that statute by willfully failing to pay over trust funds collected prior to his accession to control when at the time he assumed control the corporation has funds impressed with a trust under § 7501, but that § 7501 does...