Nakano v. United States

• Decision Date: 18 February 2014
• Docket Number: No. 11–18013.,11–18013.
• Citation: 742 F.3d 1208
• Parties: Raymond T. NAKANO, Plaintiff–Appellant, v. UNITED STATES of America, Defendant–Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

742 F.3d 1208

Raymond T. NAKANO, Plaintiff–Appellant,

v.UNITED STATES of America, Defendant–Appellee.

No. 11–18013.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted Jan. 16, 2014.

Filed Feb. 18, 2014.

Richard D. Salgado (argued) and Laura L. Gavioli, SNR Denton U.S. LLP, Dallas, TX, for Plaintiff–Appellant.

Jennifer M. Rubin (argued) and Robert W. Metzler, Attorneys, and Kathryn Keneally, Assistant Attorney General, Tax Division, United States Department of Justice, Washington, D.C., for Defendant–Appellee.

Appeal from the United States District Court for the District of Arizona, Roslyn O. Silver, Senior District Judge, Presiding. D.C. No. 2:08–cv–01026–ROS.

Before: DIARMUID F. O'SCANNLAIN, SUSAN P. GRABER, and JACQUELINE H. NGUYEN, Circuit Judges.

OPINION

GRABER, Circuit Judge:

Plaintiff Raymond T. Nakano served as Senior Vice President and Chief Financial Officer of National Airlines, Inc. (“National”), from its founding in 1995 until it filed for Chapter 7 bankruptcy in May 2003. The Internal Revenue Service (“IRS”) assessed unpaid excise taxes against Plaintiff personally, pursuant to 26 U.S.C. § 6672. He then brought this civil action against the United States, pursuant to 26 U.S.C. § 7422, for a refund of taxes erroneously assessed. The government filed a counterclaim for the unpaid balance of the tax assessments. The district court granted summary judgment to the government on both the claim and the counterclaim.

In considering this timely appeal, we address two questions: (1) whether the district court erred in holding that Plaintiff's failure to pay the excise taxes was “willful” within the meaning of 26 U.S.C. § 6672(a) despite the airline's bankruptcy and (2) whether § 6672 liability applies to excise tax payments deferred under the Air Transportation Safety and System Stabilization Act (“Stabilization Act”), Pub.L. No. 107–42, § 301(a)(1) (2001). Reviewing those legal questions de novo, Ilko v. Cal. State Bd. of Equalization (In re Ilko), 651 F.3d 1049, 1052 (9th Cir.2011) (order), we affirm. We hold that: (1) assets are “encumbered” for purposes of § 6672 only if “the taxpayer is legally obligated to use the funds for a purpose other than satisfying the preexisting employment tax liability and if that legal obligation is superior to the interest of the IRS in the funds,” Honey v. United States, 963 F.2d 1083, 1090 (8th Cir.1992), a test that is not met here; and (2) the Stabilization Act does not “allow the airlines to use the excise taxes as working capital” and does not defeat trust status for unpaid excise taxes for purposes of personal liability under § 6672, Conway v. United States, 647 F.3d 228, 236 (5th Cir.2011).

Federal law requires all airlines to collect certain excise taxes from passengers and to remit those taxes, held in trust, to the federal government at quarterly intervals. 26 U.S.C. §§ 4261, 4291, 7501. The airline passengers have original liability for the excise taxes, but the airlines incur liability for the taxes if they fail to transfer the trust funds on time. Begier v. I.R.S., 496 U.S. 53, 55, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990).

National began flying passengers in 1999, but it did not report a profit for any year during its operation. The airline filed for Chapter 11 bankruptcy on December 6, 2000. Shortly before that filing, National mailed to the IRS its quarterly excise payment check for the third quarter of 2000, in the amount of $1,832,501.01. The IRS received and deposited the check but, before it could clear, National restructured its accounts under Chapter 11 rules, and the check was returned unpaid. National made no additional efforts to pay the quarterly excise taxes, but it did begin to pay other excise taxes collected during the bankruptcy period.

In response to the terrorist attacks on September 11, 2001, Congress passed the Stabilization Act. Among many other provisions, the Act gave airlines an opportunity to defer transfer of the third-quarter 2001 excise taxes for a few weeks after the usual due date. Stabilization Act § 301(a)(1). The Act included a grant of discretionary authority to the Secretary of the Treasury to further extend the third-quarter 2001 and fourth-quarter 2001 excise tax due dates until January 15, 2002, an option that the Secretary exercised. Id.§ 301(a)(1)(A). The Act also provided that airlines could collect direct government grants. Id.§ 101(a). National received such a grant, in the amount of $21 million. It did not pay excise taxes during the deferral period.

On January 15, 2002, the deadline set by the IRS to transfer excise taxes collected, National filed a return, without enclosing payment, and requested a six-month extension. National did not submit payment for those taxes after requesting the extension, but it did submit payments and returns for later quarters. On January 30, 2002, National again filed a return for fourth-quarter 2001 excise taxes, but again failed to submit any payment.

Nine months later, National ceased operations and, on May 7, 2003, the airline converted its bankruptcy to Chapter 7. On January 29, 2003, during Chapter 7 proceedings, the IRS demanded that National remit unpaid excise taxes in the amount of $11,572,151.91. Following an administrative appeal of an earlier assessment, the government reissued assessments against Plaintiff personally in the amounts of $148,325.00, $3,497,448.32, and $4,803,626.85, for the taxable quarters ending September 30, 2000, September 30, 2001, and December 31, 2001, respectively, plus statutory interest. Plaintiff paid a nominal amount of the assessments and then filed an administrative refund claim, which the IRS denied.

Plaintiff then filed the present action in district court for recovery of taxes paid and an abatement of the amounts owing. The government counterclaimed for the amount owing and followed with a motion for summary judgment. Plaintiff moved to dismiss the government's counterclaim. The district court denied Plaintiff's motion, granted the government's motion, and entered judgment for the government in the amount of $11,553,586.11, which represents the full amount due from all three quarters plus statutory interest through November 30, 2011.

An individual can incur personal liability under 26 U.S.C. § 6672(a) for unpaid excise taxes:

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.

To impose personal liability, the statute requires that the individual (1) was “required to collect, truthfully account for, and pay over the withholding taxes” (commonly known as a “responsible person”) and (2) “willfully failed to meet one or more of these obligations.” United States v. Sotelo, 436 U.S. 268, 274, 98 S.Ct. 1795, 56 L.Ed.2d 275 (1978) (internal quotation marks omitted). In an action to collect taxes, the government bears the initial burden of proof. Oliver v. United States, 921 F.2d 916, 919 (9th Cir.1990). The government satisfies its burden by introducing evidence of the tax assessment under § 6672. Id. The burden then shifts to the taxpayer to prove that he is not liable. Id.

On appeal, Plaintiff does not challenge the district court's finding that he is a “responsible person” for purposes of § 6672.¹ But he does argue that his failure to pay over the excise taxes was not “willful” under the second prong of the Sotelo standard. In particular, Plaintiff asks us to adopt a rule that the element of willfulness under § 6672 cannot be satisfied by a failure to use “encumbered” funds to make excise tax payments, Elmore v. United States, 843 F.2d 1128, 1133–34 (8th Cir.1988), and to hold that National's bankruptcy obligations rendered all funds encumbered as a matter of law for the purpose of analyzing willfulness under § 6672.

In general, “[w]ilfulness, within the meaning of § 6672, has been defined as a voluntary, conscious and intentional act to prefer other creditors over the United States.” Davis v. United States, 961 F.2d 867, 871 (9th Cir.1992) (internal quotation marks omitted). Plaintiff does not dispute that his preference for other creditors was voluntary, conscious, and intentional. The failure to pay over the excise taxes was therefore “willful” unless Plaintiff's legal argument prevails. It does not.

We have yet to define what renders assets encumbered and thereby unavailable to support a finding of willful non-payment of excise taxes under § 6672. See Purcell v. United States, 1 F.3d 932, 938–39 (9th Cir.1993) (declining to reach the issue of what constitutes “encumbered funds” for § 6672 purposes). Every other circuit to have addressed the issue has established a narrow rule that only a legal prohibition on the expenditure of funds renders the assets encumbered.

The leading case to take this view is Honey, 963 F.2d at 1089–90. There, the Eighth Circuit considered in detail what funds are “encumbered” and “unencumbered” in this context. The court examined the text of the statute, the sparse existing precedents, and especially the purpose of § 6672. Id. The court concluded that the purpose of the statute is to ensure that the excise tax is paid and that the statute must be broadly construed to permit the government to reach those who are responsible for the corporation's failure to pay the taxes owed. Id. at 1090. The court distilled the applicable rule to the following: “funds are encumbered only where the taxpayer is legally obligated to use the funds for a purpose other than satisfying the preexisting employment tax liability and if that legal obligation is superior to the interest of the IRS in the funds.”...