Roger Byrne v. United States
857 F.3d 319
| 6th Cir. | 2017Background
- Eagle Trim, formed in 1998, failed to timely deposit employer withholding (trust-fund) taxes for portions of 1999–2000; controller Bernard “Bernie” Fuller falsified receivables and mishandled payroll deposits.
- Roger Byrne (president) and Eric Kus (CEO) had signature authority, hiring/firing power, and ultimate responsibility for overseeing finances; Fuller reported to them (later through a hired CFO).
- Eagle Trim retained CPA firm Weber, Curtin & Drake (WCD) for audits and tax preparation; WCD issued a clean December 2000 audit but later withdrew it after discovering Fuller’s intentional misentries in January 2001.
- GMAC (lender) and GM-funded crisis manager BBK performed collateral reviews and eventually took control of cash flow after discovering fraud; BBK then found delinquent payroll tax deposits for quarters in 2000 and refused requests to pay them.
- IRS assessed § 6672 penalties against Byrne and Kus for unpaid trust-fund taxes (third and fourth quarters 2000); district court found them willful and entered judgment; on appeal the Sixth Circuit reviews willfulness de novo and adopts a narrow "reasonable belief" exception.
Issues
| Issue | Plaintiff's Argument (Byrne/Kus) | Defendant's Argument (United States) | Held |
|---|---|---|---|
| Whether Byrne and Kus willfully failed to pay trust-fund taxes under 26 U.S.C. § 6672(a) | They reasonably believed taxes were being paid based on WCD audits, corrective steps (hire of assistant controller and CFO), and lacked actual knowledge of delinquency for Q3–Q4 2000 | They recklessly disregarded obvious risks by (1) relying on an unreliable controller (Fuller) after notice of prior delinquencies and (2) failing to verify deposits | Willfulness not proved for Q3–Q4 2000: court vacated judgment and remanded; Byrne and Kus showed a reasonable belief that taxes were paid |
| Standard for willfulness under § 6672 — is reckless disregard sufficient and what defense exists? | N/A (argued application facts fit reasonable-cause defense) | N/A (urged recklessness standard should impose liability for failure to investigate) | Sixth Circuit holds recklessness (deliberate/reckless disregard of known risks plus failure to investigate) can establish willfulness, but adopts the Second Circuit’s narrow "reasonable belief" exception: reasonable belief that taxes were paid defeats willfulness |
| Whether reliance on independent auditors (WCD) and hiring of personnel suffices to avoid liability | Reliance and managerial steps (hiring Gillman and CFO Jones, engaging WCD) were reasonable under the circumstances | Reliance was insufficient because WCD did not independently verify Fuller’s explanations and warned of deficiencies | Reliance on competent auditors and hiring of staff were reasonable here; auditors missed Fuller’s fraud, so appellants’ belief was reasonable |
| Scope of appellate review (factual vs legal) | Appellants argued willfulness is mixed question requiring de novo review of legal standard application | Government argued willfulness is a factual question reviewed for clear error | Court applies de novo review to willfulness as an ultimate fact applying legal standard to facts |
Key Cases Cited
- Bell v. United States, 355 F.3d 387 (6th Cir.) (discusses responsible-person and willfulness elements under § 6672)
- Gephart v. United States, 818 F.2d 469 (6th Cir.) (actual knowledge and use of unencumbered funds standard)
- Slodov v. United States, 436 U.S. 238 (Supreme Court) (willfulness requirement reflects personal fault)
- Calderone v. United States, 799 F.2d 254 (6th Cir.) (willfulness may include reckless disregard)
- Winter v. United States, 196 F.3d 339 (2d Cir.) (adopts reasonable-belief exception to § 6672 liability)
- Wright v. United States, 809 F.2d 425 (7th Cir.) (defines recklessness standard: ought to have known, grave risk, easily verifiable)
- Huizinga v. United States, 68 F.3d 139 (6th Cir.) (responsible person must use unencumbered funds once aware of past-due liability)