Wood v. U.S.

• Decision Date: 23 January 1987
• Docket Number: No. 86-1041,86-1041
• Citation: 808 F.2d 411
• Parties: -512, 87-1 USTC P 9165 L. Ray WOOD, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 411

808 F.2d 411

59 A.F.T.R.2d 87-512, 87-1 USTC P 9165

L. Ray WOOD, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Appellee.

No. 86-1041.

United States Court of Appeals, Fifth Circuit.

Jan. 23, 1987.

O. Jan Tyler, Dallas, Tex., for plaintiff-appellant.

Matthew J. Anderton, Roger M. Olsen, Acting Asst. Atty. Gen., Michael L. Paup, Chief Appellate Section, Richard Farber, U.S. Dept. of Justice, Tax Div., Washington, D.C., for defendant-appellee.

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

Before CLARK, Chief Judge, WISDOM, and HIGGINBOTHAM, Circuit Judges.

CLARK, Chief Judge:

The Internal Revenue Service assessed L. Ray Wood with $39,355.38 in unpaid withholding tax liabilities of Red Ant Products Inc. for the second, third, and fourth quarters of 1979 and the first quarter of 1980. The IRS alleged that, as to Red Ant, Wood was a "responsible person" who willfully failed to pay the taxes, and thus was liable under 26 U.S.C. Sec. 6672. Wood paid $6806.17 toward satisfaction of the assessment and filed suit for a refund. The IRS counterclaimed for the remaining amount due. The district court held in favor of the IRS, and Wood appeals. We affirm the judgment appealed from.

I.

Red Ant was organized in 1978 by Wood, Don AltGilbers, Alfred Wood (Wood's brother), and several other employees of Airline Equipment and Service Co., Inc., a corporation controlled by Wood. Red Ant manufactured seat bases and frames for recreational vehicles, a line of business the company acquired from Airline. Red Ant issued 25,000 shares of common stock at $1.00 per share to the organizers other than Wood. Instead of common stock, Wood received a $30,000 debenture convertible into one share of Red Ant common stock for each dollar of principal and accrued interest on the date of conversion. Wood was chairman of the board; several company documents also listed him as chief executive officer. AltGilbers was president of Red Ant and the parties stipulated that he controlled the everyday operation of the company. Wood, AltGilbers, and Alfred Wood were the only persons authorized to sign checks on Red Ant's checking accounts. Until June 18, 1979, AltGilbers issued and signed all of Red Ant's checks.

At the time of incorporation the organizers had high hopes for Red Ant. Those hopes collided in early 1979 with high gasoline prices and lines at the gas pumps. Red Ant's sales fell as buyers turned away from recreational vehicles because of their low gas mileage. The company began to suffer from poor cash flow. In response it slowed production and ceased replacing workers as they left the company. It also began failing to make required deposits of employment taxes. For the second and third quarters of 1979 Red Ant deposited amounts less than its total Federal Insurance Contributions Act (FICA) employers' tax liability. The IRS applied these amounts deposited for social security solely to the employers' tax liability leaving the entire liability for withholding taxes outstanding. For the fourth quarter of 1979 Red Ant's deposits exceeded its employers' tax liability. The IRS extinguished the entire employers' tax liability and applied the excess against the withholding tax liability for the quarter. Red Ant made no deposits in the first quarter of 1980.

Meanwhile, the company's financial difficulties led to other problems. On June 18, 1979 Red Ant's bank informed Wood that AltGilbers was engaging in checking and deposit practices which it claimed improperly inflated the company's balances. As a result, Wood took over signing the company's checks from AltGilbers, although AltGilbers continued to determine which creditors to pay. After other alleged improprieties, AltGilbers resigned from Red Ant on September 7, 1979. Wood then took over every day control of Red Ant. Sometime in late September, Wood received a request from the IRS for payment of Red Ant's employment tax liability for the second quarter of 1979. The request for payment was dated September 17, 1979. AltGilbers signed the employment tax return for that quarter, although Wood signed the returns for the other quarters at issue. Wood did not respond to the request for payment. He signed payroll checks in amounts that would have more than covered Red Ant's withholding tax liabilities after receiving notice that employment taxes were unpaid. Red Ant ceased operation in February 1980.

The IRS assessed Wood with the unpaid withholding tax liabilities of Red Ant. Wood's partial payment and this suit for refund ensued. The IRS counterclaimed for the remaining balance. The district court after a bench trial held for the IRS. It concluded that Wood was a responsible person not only as of June 18, 1979 when he started signing Red Ant's checks but also before that date. In addition, it found that, after receiving notice that employment taxes were unpaid, Wood acted willfully in making payments to creditors in amounts that would have extinguished Red Ant's withholding tax liabilities. Wood appeals.

II.

A.

The Internal Revenue Code requires employers to withhold from employees' wages the amounts owed by each employee for federal income taxes and the employees' share of FICA taxes. 26 U.S.C. Secs. 3402, 3102. The withheld funds are held in trust by the employer for the United States. Id. Sec. 7501(a); Howard v. United States, 711 F.2d 729, 733 (5th Cir.1983). Employees are considered to have paid the taxes to the United States even if their employer does not remit the funds to the government. Id. Employers are also required to pay employers' FICA tax in an amount that matches the employees' FICA tax. 26 U.S.C. Sec. 3111.

To account for these taxes an employer must file a quarterly employment tax return by the end of the month following the quarter for which the return is made. 26 C.F.R. Secs. 31.6011(a)-1(a)(1), .6011(a)-4(a)(1) & .6071(a)-1(a)(1) (1986). If the amount of undeposited taxes exceeds $200, the employer must deposit the taxes owed by the due date of the return. Id. Sec. 31.6302(c)-1(a)(1)(iv). In addition, if the undeposited employment taxes at the end of a quarter-monthly period (roughly a week) ¹ exceed $2000, the employer must deposit the taxes within three banking days of the end of the quarter-monthly period. Id. Sec. 31.6302(c)-1(a)(1)(ii)(b). If the amount of the undeposited employment taxes at the end of any month, except the final month of the quarter, exceeds $200, the employer is required to deposit the taxes within 15 days after the end of the month unless the employer made a deposit at the end of a quarter-monthly period during the month. ² Id. Sec. 31.6302(c)-1(a)(1)(ii)(a). The IRS regulations describe the procedure to be followed in making a deposit, which includes the use of a Federal Tax Deposit form. Id. Sec. 31.6302(c)-1(a)(2).

Individuals are not liable for undeposited employers' FICA taxes. Muntwyler v. United States, 703 F.2d 1030, 1032 (7th Cir.1983). But individuals may be liable for the unpaid withholding taxes under 26 U.S.C. Sec. 6672(a), which provides as follows:

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. No penalty shall be imposed under section 6653 for any offense to which this section is applicable.

This section thus imposes two requirements for liability: the person must be a "responsible person" and the person must act "willfully" in not paying the taxes. Brown v. United States, 591 F.2d 1136, 1139-40 (5th Cir.1979). We review findings by the district court that Wood met these requirements under a clearly erroneous standard. Fed.R.Civ.P. 52(a); see Brown, 591 F.2d at 1140; Neckles v. United States, 579 F.2d 938, 940 (5th Cir.1978) (per curiam).

B.

Wood concedes that he was a responsible person beginning on September 7, 1979, when he took over day-to-day management of Red Ant from AltGilbers. He argues, however, that he was not a responsible person before that date because AltGilbers determined which creditors would be paid. Both Wood and his brother Alfred Wood testified at trial that Wood was not responsible for ensuring that taxes were paid. Wood urges that because the district court found both his and his brother's testimony credible, the court's conclusion that he was a responsible person is clearly erroneous. Wood relies on Godfrey v. United States, 748 F.2d 1568 (Fed.Cir.1984), which held that merely being an active chairman of the board is not a sufficient basis for liability. Id. at 1576.

Responsibility is a matter of status, duty, and authority. Howard v. United States, 711 F.2d 729, 734 (5th Cir.1983). This circuit generally takes a broad view of who qualifies as a responsible person. Commonwealth National Bank v. United States, 665 F.2d 743, 751 (5th Cir.1982). The record supports the district court's conclusion that Wood had "the status, duty and authority to pay the taxes owed" for all the quarters at issue. Howard, 711 F.2d at 734. He had a substantial financial interest in Red Ant through the debenture, which was convertible at his option into sufficient shares of stock to give him a controlling interest in the company. As chairman of the board he took an active role in the decisions made by the board. Several corporate documents also refer to him as chief executive officer of Red Ant. He was one of only three persons authorized to sign the company's checks, and only one signature was required to negotiate a check. The fact that, with no change in authority, Wood took over the signing of checks after June 18 and ran day-to-day operations after ...