Williams v. U.S., 90-7157

• Decision Date: 17 May 1991
• Docket Number: No. 90-7157,90-7157
• Citation: 931 F.2d 805
• Parties: -1024, 91-1 USTC P 50,285, Unempl.Ins.Rep. CCH 16038A Elliott T. WILLIAMS, Plaintiff, v. UNITED STATES of America, Defendant-Counterclaim and Third-Party Plaintiff, Appellant, v. Larry HOUSE, Third-Party Defendant Appellee.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 805

931 F.2d 805

67 A.F.T.R.2d 91-1024, 91-1 USTC P 50,285,

Unempl.Ins.Rep. CCH 16038A

Elliott T. WILLIAMS, Plaintiff, v. UNITED STATES of America, Defendant-Counterclaim and Third-Party Plaintiff, Appellant, v. Larry HOUSE, Third-Party Defendant Appellee.

No. 90-7157.

United States Court of Appeals Eleventh Circuit.

May 17, 1991.

Frank W. Donaldson, U.S. Atty., Caryl P. Privett, Asst. U.S. Atty., Birmingham, Ala., Gary R. Allen, Chief, David M. Moore, Richard Farber, Brian C. Griffin, Appellate Section, Tax Div., Dept. of Justice, Washington, D.C., for defendant-counterclaim and third-party plaintiff-appellant.

Stephen L. Poer, Haskell, Slaughter & Young, Birmingham, Ala., for third-party defendant-appellee.

Appeal from the United States District Court for the Northern District of Alabama.

Before CLARK and BIRCH, Circuit Judges, and COFFIN ^*, Senior Circuit Judge.

BIRCH, Circuit Judge:

The United States District Court for the Northern District of Alabama ("the District Court") entered judgment in favor of Larry House ("House") in accordance with jury verdicts finding House not liable under 26 U.S.C. Sec. 6672 ("section 6672") for willful failure to collect and pay over federal employment taxes withheld from the wages of employees of American Intermedical Resources, Inc. ("AIR"). The United States subsequently filed a motion in the District Court for judgment notwithstanding the verdict or, in the alternative, a new trial. The United States appeals from the District Court's order denying that motion. We REVERSE the denial of the United States' motion for judgment notwithstanding the verdict, finding as a matter of law that House was a responsible person who willfully failed to pay over federal employment taxes.

I. BACKGROUND

A. Factual Background

House and Elliott Williams ("Williams") each owned fifty percent of the stock of AIR, a corporation providing respiratory and cardiology services to hospitals and clinics. As the president and chief operating officer of AIR, House supervised its daily operations. Williams, secretary-treasurer and chairman of the board of directors of AIR, arranged the company's financing.

In 1981, Williams established, on behalf of AIR, a banking relationship with the Central Bank of the South ("the Bank"). AIR opened three accounts at the Bank: a general depository account, a payroll account, and a general operating account. AIR also obtained financing from the Bank in the form of a $500,000 term loan and a $650,000 revolving line of credit. Both the term loan and the revolving line of credit were secured by AIR's assets and accounts receivable. The term loan was guaranteed personally by Williams and House.

In February, 1982, the Bank requested that Williams personally endorse the remainder of the debt owed by AIR to the Bank. After Williams refused, the Bank, as a secured creditor, implemented a "daily accounting procedure," whereby AIR reported and delivered to the Bank all of its receipts on a daily basis. The Bank then made decisions as to the disbursement of AIR's receipts, most of which the Bank used to reduce the amount of AIR's indebtedness to the Bank. Although payments to AIR's other creditors fell behind, the Bank did allow employee payroll and withholding tax payments to be made, even if these payments created overdrafts in AIR's accounts. The Bank terminated the daily accounting procedure in April, 1982. From April, 1982, until September, 1983, AIR continued to make payments to the Bank, meet its ongoing operation expenses, compensate its employees, and make withholding tax payments.

In September, 1983, the Bank again requested that Williams personally guarantee the remainder of the debt AIR owed the Bank. After Williams refused, the Bank demanded reduction of AIR's loan balances; refused to extend further credit on AIR's revolving line of credit; and, without giving notice to AIR, ceased covering any of AIR's overdrafts ¹. A daily accounting procedure was placed into effect. Monies received by AIR were presented to Gene Boles ("Boles"), a vice-president loan administrator of the Bank, who deposited the amounts received into AIR's general depository account. Boles then determined which of AIR's creditors would be paid, and transferred AIR's money among its different accounts accordingly. On more than one occasion, checks written by AIR were returned for insufficient funds because the Bank had "swept" ² AIR's general depository account.

The federal employment taxes withheld from the wages of AIR employees in the third quarter of 1983 were due to be paid in October, 1983. Accordingly, AIR submitted these tax payments directly to the Bank for deposit in an Internal Revenue Service ("IRS") account ³. However, on several occasions the Bank would not accept these withholding tax payments because AIR's account did not contain sufficient funds. When this occurred, House informed Boles and Tony Cashio ("Cashio"), a commercial loan officer at the Bank, that because they had chosen to extend credit to AIR for the amount of the payroll checks, they also must extend credit for the withholding tax payments. When the Bank remained reluctant to accept the withholding tax payments, House mailed payments directly to the IRS. However, because the Bank continued to sweep AIR's account, several checks made payable to the IRS were returned for insufficient funds. When House learned that AIR's withholding tax payments were past due, he again spoke to Cashio and Boles about their failure to make funds available for withholding tax payments.

The Bank demanded full payment of AIR's outstanding loans on January 26, 1984. Because AIR was unable to meet this demand, the Bank placed AIR into "liquidation mode." The Bank contacted AIR's account debtors, instructing them to remit their payments directly to the Bank. The Bank deposited the amounts received in AIR's general depository account, swept the account, and applied most of the money to pay down AIR's loans from the Bank. The Bank also allowed payments to AIR's employees and to those of AIR's creditors whose continued services were necessary for AIR to remain in business. During this time, House met with Boles on several occasions, attempting to make withholding tax payments on behalf of AIR. Boles would not accept the tax deposit checks, claiming that after the Bank swept AIR's account there was money sufficient to satisfy only AIR's payroll expenses, not the outstanding withholding taxes.

On February 23, 1984, AIR's indebtedness to the Bank was discharged. Accordingly, the Bank released control over AIR's accounts receivable, inventory and other assets. AIR's relationship with the Bank terminated, and House opened a new depository account on behalf of AIR with another bank. Soon thereafter, in March of 1984, Williams resigned from AIR, assigning his stock in AIR to House.

House was in control of AIR from March, 1984 until November, 1984, when AIR ceased to conduct business. During this time, House made payments to the IRS in an attempt to reduce the amount of AIR's past due withholding taxes, ⁴ and paid to the IRS the taxes withheld during this period from the wages of AIR's remaining employees. However, a check for the taxes withheld from the last AIR payroll was not sent to the IRS. On November 27, 1984, AIR's sole bank account was garnished by one of AIR's creditors. This garnishment depleted the funds available to AIR, and precluded the payment of the taxes withheld from the employees' wages.

In May, 1985, House, on behalf of AIR, entered into an installment agreement with the IRS to pay off AIR's outstanding withholding taxes. House made several payments under this plan. The IRS later assessed against House a 100% penalty for the withholding taxes due for the first quarter of 1983, the first quarter of 1984 and the third quarter of 1984. In response, House dispatched a handwritten letter to the IRS on November 27, 1985. In that letter, House explained that for the third quarter of 1983 and the first quarter of 1984, Williams and the Bank were in control of AIR's finances and would not allow House access to any of AIR's assets. The letter further described House's attempts to pay the employment taxes withheld from the wages of AIR's employees.

B. Procedural Background

On December 18, 1987, Williams filed a complaint in the District Court against the United States, seeking a refund of a $1000 payment he had made in partial satisfaction of a penalty assessed against him pursuant to section 6672 for the past due employment taxes withheld from the wages of AIR's employees for the third quarter of 1983 and the first quarter of 1984. The United States responded to Williams' claim on February 29, 1988, and filed a counterclaim against him for the remainder of the assessment. The counterclaim joined House as an additional defendant and sought the balance of the penalty assessed against House for the unpaid taxes withheld during the third quarter of 1983 and the first and third quarters of 1984.

Prior to trial, the United States and Williams reached a settlement as to the issue of Williams' liability. The case against House, however, was not dismissed, and the issues surrounding House's section 6672 liability for the third quarter of 1983 and the first and third quarters of 1984 were presented to a jury. After the District Court denied the United States' motion for a directed verdict, the jury returned its verdicts. The jury found that House was responsible for collecting, accounting for and paying over the taxes withheld from the wages of the employees of AIR during the third quarter of 1983 and the third quarter of 1984, but concluded that House's failure to do so was not willful. The jury determined that House was not responsible for collecting, accounting for and paying over the taxes withheld from the wages of AIR's employees during the first quarter of 1984. In accordance with these verdicts, the District...