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 En Banc Denied Sept. 10, 1970.
431 F.2d 742
Robert I. White, Robert L. Waters, Houston, Tex., for plaintiff-appellee; Chamberlain & Hrdlicka, Houston, Tex., of counsel.
Before RIVES, GOLDBERG and GODBOLD, Circuit Judges.
RIVES, Circuit Judge:
Newsome instituted this action against the United States for recovery of his partial payment of a penalty assessed against him under
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
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
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.
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
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
The taxes withheld from employees’ wages are held by the corporation as a special fund in trust for the United States.
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
The responsible officer‘s actions before the due date for payment of the withheld taxes satisfies the “willfulness” requirement under
with respect to the taxes from which such fund arose.” 26 U.S.C.A. It is clear from the legislative history and Treasury Regulations that “person” as used in section 7501 is the corporation (or other employer) collecting or withholding the taxes—not its officers. S.Rep.No.558, 73d Cong., 2d sess., p. 53, 1939-1 Cum. Bull. (Part 2) 586, 626; Treasury Reg. 301.6672-1.
to the government. Of course, the officer is only liable under
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 def-
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 the direction of New Wolf‘s bank in March 1962 reflected that the statements prepared in December had overstated accounts receivable as of November 30, 1961 by approximately $100,000. Although it is not clear from the district court‘s opinion, the court‘s finding is premised upon the following: Newsome, after examining the financial statements on December 27, 1961, believed New Wolf would collect a sufficient amount of receivables to remit the withheld taxes for the fourth quarter of 1961, even though the balance sheet also reflected “cash on hand and in banks” as $7,737.59 and withheld income and payroll taxes as approximately $20,700. If the accounting firm had not overstated the amount of trade receivables, New Wolf would not have paid its creditors from December 27 through January 1962 until sufficient funds were received and the withheld taxes were paid.
The above circumstances do not constitute a “reasonable cause” for Newsome‘s failure to account for and pay over the withheld taxes. Whether or not Newsome believed New Wolf had a sufficient amount of outstanding trade receivables, as of the end of the quarter, to pay the withheld taxes demonstrates only the absence of an intent to deprive the government of funds owed by New Wolf. We have previously pointed out that the element of “willfulness” does not require an intent to deprive the United States of its taxes. Gefen v. United States, supra, 400 F.2d at 482 n. 7; Dillard v. Patterson, supra, 326 F.2d at 304.
The district court‘s finding that Newsome relied upon the advice of New Wolf‘s attorney is apparently in reference to (i) the attorney‘s assistance in drafting a letter to the District Director and (ii) the attorney‘s advice on February 9, 1962 that Newsome should execute a chattel mortgage in favor of its bank. We conclude that the district court erred in holding that (i) and (ii) constituted reasonable cause for Newsome‘s failure to account for and pay over the withheld taxes.
In assisting Newsome to draft a letter, explaining the delay in payment to the District Director, the attorney‘s only advice was that Newsome send in Form 941 without payment (unless he was certain that sufficient funds were in the bank to cover the check) with the explanation that the delay was due to New Wolf‘s failure to collect certain receivables and that payment would be made within ten days. Newsome was not advised, nor did he interpret the advice as meaning, that he had been justified in using withheld taxes during December
III.
In addition to our conclusion that the advice of New Wolf‘s accountants and counsel does not constitute “reasonable cause,” we hold that Newsome “willfully” failed to pay over the taxes due and thus is liable under
On December 27, 1961, Newsome examined financial statements prepared by New Wolf‘s accountants, including a balance sheet as of November 30, 1961. Although the statements reflected that current assets ($345,266.58) exceeded
current liabilities ($302,035.39), “cash on hand and in banks” was $7,739.59 and withheld payroll taxes were approximately $20,700 (withheld income taxes—$17,090.87; withheld F.I.C.A. taxes—$3,643.14). Thus, as of December 1, either taxes withheld from employees’ wages had been used for other purposes or net wages had been paid at a time when New Wolf had insufficient funds to cover the taxes thereon. During December New Wolf made regular payroll payments. The mid-December deposit13 for its November withholding amounted to only $2,169.65. As of December 29, 1961, New Wolf‘s bank statement reflected a balance of $2,073.15. With knowledge of these facts, which reflected a substantial amount of withheld taxes but only a small amount of funds, Newsome permitted New Wolf to pay its creditors during the month of January, apparently under the expectation that New Wolf would collect a sufficient amount of receivables to remit the withheld taxes by January 31, 1962.14
Under these circumstances, Newsome‘s conduct amounted to a voluntary, conscious and intentional action to use the withheld taxes for payments to other corporate creditors with the ultimate result of nonpayment to the government.15
The district court erred in entering judgment in favor of Newsome against the United States for the amount of Newsome‘s partial payment of the penalty, $28.00, and in further adjudging that Newsome is not liable in any amount on the government‘s counterclaim. The judgment is therefore reversed and the cause remanded.16
Reversed and remanded.
ON PETITION FOR REHEARING AND PETITION FOR REHEARING EN BANC
PER CURIAM:
On petition for rehearing Newsome‘s attorneys state: “On these facts, the Court‘s opinion, reversing the district court, imposes personal liability on Newsome for the payroll taxes withheld for the fourth quarter of 1961 in the amount of approximately $31,000.” That is not accurate. The amount of the judgment was left to be determined on remand. (See footnote 16 at close of original opinion.)
1967). See also Seaton v. United States, 254 F.Supp. 161 (W.D.Mo.1966); Long v. Bacon, 239 F.Supp. 911 (S.D.Iowa 1965); Tiffany v. United States, 228 F.Supp. 700 (D.N.J.1963).
As their first point, petitioner‘s attorneys urge: “The Court has patently erred in construing
“Section 7501 provides, as was provided in the original enactment in 1934, that withheld taxes ‘shall be held to be a special fund in trust for the United States.’ It is crucial to note that the statute says such taxes ‘shall be held to be a special fund in trust’ not ‘shall be held as a special fund in trust.’ The difference in language was intentional, for the predecessor of Section 7501 was enacted for the explicit purpose of providing the United States with a priority in an insolvency proceeding, the language being explicitly directed to courts involved in those insolvency proceedings, i.e., cash in an amount equal to the withheld taxes shall ‘be held [by the courts] to be a special fund in trust,’ and, upon that basis the United States would have a prior claim.” (Emphasis is that of petitioner‘s attorneys.)
This argument is startling. We had not thought that Congress either would or could direct the courts what to hold, and we remain far from convinced. The normal way for Congress to accomplish any such purpose would be actually to impress the withheld taxes with a trust in favor of the United States. The legislative history of
“The Senate Committee Report, S.Rep. No. 558, 73d Cong., 2d Sess., p. 53, noted:
” ‘Under existing law the liability of the person collecting and withholding the taxes to pay over the amount is merely a debt, and he cannot be treated as a trustee or proceeded against by distraint. Section [7501(a)] * * * impresses the amount of taxes withheld or collected with a trust and makes applicable for the enforcement of the Government‘s claim the administrative provisions for assessment and collection of taxes.’
The Conference Report, H.Conf.Rep. No. 1385, 73d Cong., 2d Sess., p. 32, reflected the same purpose:
” ‘This amendment impresses taxes collected or withheld with a trust in favor of the United States and makes applicable for the enforcement of the Government‘s claim the administrative provisions applying to the assessment, collection, and payment of taxes.’ ”
Our original opinion (footnote 6) pointed out that the legislative history (and Treasury Regulations) also made clear “that ‘person’ as used in section 7501 is the corporation (or other employer) collecting or withholding the taxes—not its officers. S.Rep.No. 558, 73d Cong., 2d sess., p. 53, 1939 1 Cum.Bull. (Part 2) 586, 626; Treasury Reg. 301.6672-1.” at 745. As to the “willfulness” requirement, we held that the responsible officer “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.” at 746.
In their point 2, petitioner‘s attorneys attack that holding as follows:
“Restated, until the instant decision, all courts of appeals have consistently held that there can be no willful failure to pay over payroll taxes to the Government unless (1) the corporate officer knows he is put to a choice of paying either general creditors or the Government in circumstances where he knows the corporation cannot pay both and (2) that officer then decides to pay general creditors.”
Similarly in their point 3, petitioner‘s attorneys urge: “The prior decisions of this Court, heretofore cited, with clarity and uniformity established that a willful failure under Section 6672 involves a conscious preference of another creditor over the Government.”
The attorneys are simply mistaken. It is true that a conscious preference of another creditor over the United States is the usual way by which a “person” becomes liable for the penalty prescribed by
Contrary to the argument of petitioner‘s attorneys, this is not the first decision in which the trust fund theory of
We find no merit in Newsome‘s petition for rehearing. The Petition for Rehearing is denied and the Court having been polled at the request of one of the members of the Court and a majority of the Circuit Judges who are in regular active service not having voted in favor of it (Rule 35, Federal Rules of Appellate Procedure; Local Fifth Circuit Rule 12), the Petition for Rehearing En Banc is also denied.