Roth v. U.S., 85-7192
| Decision Date | 16 January 1986 |
| Docket Number | No. 85-7192,85-7192 |
| Citation | 779 F.2d 1567 |
| Parties | -603, 86-1 USTC P 9172, Unempl.Ins.Rep. CCH 16,566 Charles Richard ROTH, Plaintiff-Counterclaim Defendant, Appellee, v. UNITED STATES of America, Defendant-Counterclaim Plaintiff, Appellant. |
| Court | U.S. Court of Appeals — Eleventh Circuit |
Glenn L. Archer, Jr., Asst. Atty. Gen., U.S. Dept. of Justice, Tax Div., Washington D.C., Michael L. Paup, Chief, Richard Farber, Nancy G. Morgan, Attys., Appellate Section, U.S. Dept. of Justice, Washington, D.C., Frank W. Donaldson, U.S. Atty., Caryl P. Privett, Asst. U.S. Atty., Birmingham, Ala., for defendant-counterclaim plaintiff, appellant.
John Joseph Smith, Jr., Birmingham, Ala., for plaintiff-counterclaim defendant, appellee.
Appeal from the United States District Court for the Northern District of Alabama.
Before GODBOLD, Chief Judge, JOHNSON, Circuit Judge, and TUTTLE, Senior Circuit Judge.
This is an appeal by the United States from a denial by the trial court of a motion for j.n.o.v. after a jury had found that the appellee, Roth, was not a "responsible person" within the meaning of Section 6672 of the Internal Revenue Code of 1954 who would be required "to collect such tax, and truthfully account for and pay over such tax" to the United States government.
Taxpayer, Charles Richard Roth, filed this suit to recover $200.00 which he had paid on a penalty of $22,805.26 imposed against him pursuant to Section 6672 of the Internal Revenue Code of 1954, 1 for failure to collect and pay over federal employment taxes withheld from the wages of the employees of Leewood Development Corp. (later Leewood, Inc.) for the last two quarters of 1977. The United States filed a counterclaim against taxpayer for the unpaid balance of the assessment amounting to $22,637.89 plus interest. The case was tried to a jury which returned a verdict that taxpayer was not a person responsible for the unpaid employment taxes with respect to the stated quarters. The government, having moved for directed verdict, thereafter moved for judgment notwithstanding the verdict which was denied in an opinion and order entered on January 9, 1985.
With a single exception, the facts that went to the jury were undisputed. The one exception is the conflict in testimony between the plaintiff, Roth, and Dobbins, the chief executive officer and president and majority owner of the corporation. Roth testified that he was instructed by Dobbins in August of 1977 not to pay the withheld employees' taxes, but to pay other creditors and the salaries of the employees. Dobbins denied that he gave such instructions and denied that he knew the taxes were unpaid. Thus, the only issue presented to the jury was that presented by a charge to the jury, duly objected to by the United States, as follows:
Even if you, the jury, find that plaintiff is otherwise a responsible person within the meaning of the statute, but also find that the plaintiff was prevented from paying the payroll taxes by specific instructions by the president of the company, then you must find that plaintiff did not willfully fail to pay the payroll taxes and plaintiff must be relieved of liability.
As we have stated above, the evidence which would establish the fact that the "plaintiff is otherwise a responsible person within the meaning of the statute" is undisputed. Essentially, it is as follows.
Roth was offered an opportunity to participate in a small corporation to be organized by Dobbins who was a real estate developer and who was a beneficiary of a trust which owned the majority stock in a number of other real estate corporations. After incorporation of Leewood Development Corporation ("LDC"), whose name was later changed to Leewood, Inc., Roth was named executive vice president and Dobbins became president and chairman of the board. Roth was not a director. LDC was engaged in contracting with builders for performing part of construction projects, such as putting sheet rock in buildings under construction. Initially, LDC and Roth and his secretary and bookkeeper had offices in the same complex as Dobbins and his other companies. Within a year, however, Leewood moved away into a warehouse which was used for the storing of material used in its construction work. At all times, Roth hired office employees and signed checks for the payrolls, including his salary of $700.00 a week. He paid substantially all bills for supplies and signed the checks paying to the United States the amount deducted from the employees as payroll deductions, so long as these were paid. Roth had signature authority on all of the company's checking accounts and he drew most of the checks, including those for his weekly salary until he resigned towards the end of the second quarter of 1977. He signed as the officer of the company a mortgage for $115,000.00 secured by property belonging to Dobbins and which was also endorsed by Dobbins. Roth was given an option to buy up to 50 percent of LDC's corporation stock which he never exercised. Taxpayer made the contracts which the company performed and, according to his testimony, he handled "the day to day operations of Leewood Development Corporation." From the middle of August, 1977, taxpayer was aware of the fact that the payroll taxes were not being remitted to the United States although he had at all times known of the obligation of the company to transfer them. During the period involved, the company had more than sufficient funds to have paid all of the withheld taxes.
According to the verdict of the jury, it must have believed Roth's testimony that he told Dobbins in August, 1977, that the company did not have the funds necessary to pay the payroll taxes.
The jury must also have accepted the following testimony by Roth:
BY MR. SMITH:
Q. Let me ask it this way, then, Rick. Were you aware that the payroll taxes had not been paid?
A. Yes, sir.
Q. When were you made aware of that?
A. Approximately the middle of August of '77.
Q. Okay. Who made it aware to you?
A. Kathy Hosmar [the company's bookkeeper].
Q. Okay. What did you do when you were aware that Leighwood didn't have sufficient funds to pay the payroll taxes?
A. I contacted Mr. Dobbins to see what would be done at that point.
Q. Did you have a conversation?
A. Yes, sir.
Q. What was that conversation?
A. The conversation was that what was we going to do in getting the money to the company to pay the taxes and when would it be in there and how was we going to pay it.
Q. And what did he tell you?
Q. Okay. What did Mr. Dobbins tell you, Rick?
A. He came to the office and he looked at the amount of taxes that was owed and we had a discussion on where we could come up with the money.
And his conversation with me was that he had some apartments that would be sold and, upon the sale of those apartments, he would put the necessary funds in the company to pay the taxes.
Q. Did he give you any instructions--
A. At that time--
Q. About who to pay and who not to pay?
A. At that time, he was thinking that the apartments would close very soon. So his instructions to me was to be sure to make the payroll and pay the creditors so we could stay in business, that these apartments could close and he could pay the taxes and not to pay the taxes, and it would put the company in bankruptcy.
Q. What did you do?
A. I done what Mr. Dobbins told me to do. I made the payroll and paid the creditors that was necessary to keep getting the material, waiting for the apartments to close so that we might be able to pay the taxes.
Q. And this was in August of '77, you say?
A. Yes, sir.
Q. Did you talk to him at any time subsequent to August of '77 about payroll taxes?
A. Not to my knowledge, because it was August before I was aware that the taxes was--
Q. After August, did you talk to him about these payroll taxes?
A. Almost weekly.
Q. What was his response?
A. Well, the response that I got was that whatever the problem was, it was a problem with closing on the apartments due to some zoning laws in Vestavia, and it was going to take longer than he first anticipated to close the apartments and come up with case.
Q. What instructions, if any, did he give you?
A. To continue to keep the company going until he could close those apartments and pay those taxes.
Thus, it is plain that we have a case in which it is clear that Roth was a responsible person within the contemplation of the Act, unless he was removed from that status by the instructions given him by Dobbins. Although Dobbins testified that he did not give Roth any such instructions, because he did not even know that the payments on the 941 forms were past due until the end of November, 1977, we must treat the case as if the jury believed Roth's testimony with respect to this rather than that of Dobbins.
The sole issue before the Court is whether it is true that an otherwise responsible person under the Act sheds that status if, after the taxes are withheld, and while they are being continually withheld, such responsible person is directed by an officer with authority to control his actions as to corporate affairs not to pay the government's trust funds to the Internal Revenue Service. Initially, we must consider the nature of the funds we are talking about. They are amounts which LDC deducted from the payroll checks given to its employees for the payment of the employee's income tax and Social Security taxes, together with the amount that LDS itself owed as Social Security taxes for the employees. Next, we must realize that the statute that requires these funds to be withheld by an employer makes these trust funds of the United States. Also,...
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