Newsome v. United States, 27613.

• Citation: 431 F.2d 742
• Decision Date: 10 September 1970
• Docket Number: No. 27613.,27613.
• Parties: J. A. NEWSOME, Jr., Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.
• Court: United States Courts of Appeals. United States Court of Appeals (5th Circuit)

431 F.2d 742 (1970)

J. A. NEWSOME, Jr., Plaintiff-Appellee, v. UNITED STATES of America, Defendant-Appellant.

No. 27613.

United States Court of Appeals, Fifth Circuit.

July 8, 1970.

Rehearing Denied and Rehearing Denied September 10, 1970.

Anthony J. P. Farris, U. S. Atty., James R. Gough, Asst. U. S. Atty., Houston, Tex., John O. Jones, Tax Division, Dept. of Justice, Fort Worth, Tex., Johnnie M. Walters, Asst. Atty. Gen., Lee A. Jackson, William A. Friedlander, Jeanine Jacobs, Attys., Tax Div., Dept. of Justice, Washington, D. C., Carolyn R. Just, Atty., Dept. of Justice, Washington, D. C., for defendant-appellant.

Robert I. White, Robert L. Waters, Houston, Tex., for plaintiff-appellee; Chamberlain & Hrdlicka, Houston, Tex., of counsel.

Before RIVES, GOLDBERG and GODBOLD, Circuit Judges.

Rehearing Denied and Rehearing En Banc Denied September 10, 1970.

RIVES, Circuit Judge:

Newsome instituted this action against the United States for recovery of his partial payment of a penalty assessed against him under section 6672 of the Internal Revenue Code of 1954.¹ The assessments were against Newsome, as the responsible officer of New Wolf Construction Company (New Wolf), for willfully failing to account for and pay over the social security and federal income taxes withheld from New Wolf's employees during the fourth quarter of 1961 ($31,074.81) and the first quarter of 1962 ($7,724.25). The government counterclaimed for the balance due. The district court entered judgment for Newsome. Newsome v. United States, 301 F.Supp. 757 (S.D.Tex.1968). On appeal the government contends that the district court's holding — that Newsome's failure to account for and pay over the taxes withheld was not willful — is erroneous because contrary to standards of law applicable under section 6672.

The facts as found by the district court (301 F.Supp. 760, 761) are not questioned on appeal. Both parties accept the conclusion of the district court "that Newsome was a person within the meaning of §§ 6672 and 6671(b) of the Internal Revenue Code of 1954 up to and through February 14, 1962, but was not such a person thereafter" (301 F.Supp. at 761).²

The gist of the district court's decision is summarized in the concluding paragraph of its opinion:

"Viewing the record in this case as a whole, the Court is persuaded that Newsome did not wilfully fail to pay over the payroll taxes involved for the fourth quarter of 1961 and for January of 1962, in that he had reasonable cause for not paying such taxes because of his reliance upon the advice and information furnished by regularly employed accountants and attorneys, and he was not negligent in following such advice in that in following such advice he exercised the degree of ordinary care and prudence required of a man in his position and under the circumstances described."

Newsome v. United States, supra, 301 F.Supp. at 762.

This conclusion, the government argues, misapplies the standards applicable to Newsome's statutory duty to truthfully account for and pay over the taxes withheld from New Wolf's employees. The government contends that Newsome's failure to account for and pay over was "willful" within the meaning of section 6672. Its argument is two-fold: (1) that before January 29, 1962, Newsome was "willful" when he permitted taxes withheld from employees' wages to be used by New Wolf to meet corporate expenses and obligations in the expectation that corporate receivables would be collected in sufficient amount to replace the expended withheld funds by the date for payment to the government; and (2) that Newsome was "willful" when he continued to use available funds to prefer other creditors after he was informed on January 29, 1962, that there were insufficient funds to remit the withheld taxes for the fourth quarter of 1961.

I.

Where, as here, the employer has collected the tax by withholding from employees' wages but has failed to pay it over to the United States, the employees are credited with payment. Dillard v. Patterson, 326 F.2d 302, 304 (5 Cir. 1963); United States Fidelity & Guaranty Co. v. United States, 201 F.2d 118, 120 (10 Cir. 1952). Unless the government has recourse for collection of the taxes withheld or an equal sum, it must suffer the loss.

While the penalty imposed by section 6672 is distinct from and not in substitution of the liability for taxes owed by the employer,³ it brings to the government only the same amount to which it was entitled by way of the tax. The Second Circuit has stated succinctly that the penalty "is simply a means of ensuring that the tax is paid." Botta v. Scanlon, 314 F.2d 392, 393 (2 Cir. 1963). Section 6672's "basic purpose is the protection of governmental revenue. * * * It provides a remedy to prevent the unnecessary loss of tax funds by permitting the `taxing authority to reach those responsible for the corporation's failure to pay the taxes which are owing.'" Monday v. United States, 421 F.2d 1210, 1216 (7 Cir. 1970), and cases cited therein.

Willful

It must be remembered, however, that while the corporation is absolutely liable for the taxes withheld from its employees, the penalty imposed upon its responsible officer or employee is only for his willful failure. The word "willful" is susceptible of many meanings. As noted by this Court in Frazier v. United States, 304 F.2d 528, 529 (5 Cir. 1962): "As with many such issues, the definition of `willful' has been smothered with a maze of semantics." It has been consistently held by this Court and other courts that "willfully," as used in section 6672, does not require a criminal or other bad motive on the part of the responsible person, but simply a voluntary, conscious and intentional failure to collect, truthfully account for, and pay over the taxes withheld from the employees.⁴

In many of these cases, a responsible officer's "willfulness" is established by the knowing preference of other corporate creditors over the United States after the due date⁵ for the corporation to remit the withheld taxes. However, liability under section 6672 can also be premised upon use of withheld funds for other corporate purposes before the date for the corporation to pay over the funds.

The taxes withheld from employees' wages are held by the corporation as a special fund in trust for the United States. Section 7501; see Monday v. United States. 421 F.2d 1210, 1214 (7 Cir. 1970); United States v. Hill, 368 F.2d 617, 621 (5 Cir. 1966).⁶ Although section 7501 does not require a corporation to segregate the withheld taxes from its general funds,⁷ it is clear that the withheld taxes are more than simply a debt of the corporation.

Since a corporation can act only through its agents — its officers and those designated by the officers — a corporate officer or agent has a duty to see that withheld funds are properly collected from the employees, are maintained during the quarter,⁸ and are paid over to the government at the end of the quarter. This duty, for purposes of section 6672 liability, is a continuing one which arises when the federal income and social security taxes are withheld from employees' wages and ends when such funds are paid over to the United States.⁹

The responsible officer's actions before the due date for payment of the withheld taxes satisfies the "willfulness" requirement under section 6672: when the responsible officer (as defined by section 6671(b)) knows that the withheld funds are being used for other corporate purposes, regardless of his expectation that sufficient funds will be on hand on the due date for payment over to the government. Of course, the officer is only liable under section 6672 if the corporation does not pay over the withheld taxes at the date prescribed in the regulations. However, he subjects himself to liability under 6672 when he voluntarily and consciously "risks" the withheld taxes in the operation of the corporation, and subsequently the corporation is unable to remit the withheld taxes.

One example of using withheld taxes for other corporate purposes would be when, at any time during the quarter, the responsible officer is aware that the amount of corporate funds is lower than the amount of taxes withheld for the quarter and allows, or has knowledge of, the corporation's continuing to pay other corporate creditors. See Part III, infra.

Reasonable Cause

In defining the term "willfully" this Court, although other Circuits have held to the contrary,¹⁰ has held that "reasonable cause" is part of the civil test in determining whether the failure to collect, account for, and pay over was willful.¹¹ Without attempting a precise definition, we point out only that, in order to further the basic purposes of section 6672, see p. 4, supra, reasonable cause should have a very limited application. See cases cited in note 12, infra.

II.

After defining "reasonable cause" as "the failure to exercise ordinary care and prudence in connection with his actions," the district court concluded that Newsome

"* * * had reasonable cause for not paying such taxes because of his reliance upon the advice and information furnished by regularly employed accountants and attorneys, and he was not negligent in following such advice in that in following such advice he exercised the degree of ordinary care and prudence required of a man in his position and under the circumstances described."

301 F.Supp. at 762. Without giving approval to the court's definition of reasonable cause, we conclude that, under any circumstances, the "advice and information" which Newsome received from New Wolf's accountants and attorneys do not constitute reasonable cause for his failure to account for and pay over the withheld taxes.

The district court's finding of Newsome's reliance upon advice and information of New Wolf's accountants is apparently a reference to the June-November 1961 financial statements received by Newsome on December 27, 1961. New financial statements prepared at...