Opinion ID: 581460
Heading Depth: 3
Heading Rank: 2

Heading: The Slodov Decision

Text: 22 Davis argues that his actions fall within the exception to section 6672 liability carved out by the Supreme Court in Slodov. The Supreme Court held in Slodov that, if new management of a corporation assumes control when a delinquency for trust fund taxes already exists and the withheld taxes have already been dissipated by prior management, the new management's use of after-acquired revenues to satisfy creditors other than the United States does not make it personally liable for a section 6672 penalty. 436 U.S. at 259-60, 98 S.Ct. at 1791-92. 23 Mr. Slodov purchased the stock and assumed management of three corporations on January 31, 1969. At that time, the corporations owed $250,000 in unpaid withholding taxes. All of the money withheld from the employees' salaries had been spent by prior management before Slodov assumed control. Indeed, when Mr. Slodov came to the helm, the corporations had absolutely no funds, trust or otherwise, with which to pay the tax debt. Under Mr. Slodov's guidance, the companies acquired sufficient revenue to pay the tax liability, but Mr. Slodov used the money to meet other obligations such as wages, rent, and supplies. 24 The Supreme Court concluded that Mr. Slodov's actions did not incur personal liability under section 6672. 25 [Section] 7501 does not impress a trust on after-acquired funds, and ... the responsible person consequently does not violate § 6672 by willfully using employer funds for purposes other than satisfaction of the trust-fund tax claims of the United States when at the time [the responsible person] assumed control there were no funds with which to satisfy the tax obligation and the funds thereafter generated are not directly traceable to collected taxes referred to by that statute. 26 Id. at 259-60, 98 S.Ct. at 1791 (footnote omitted). 27 Informing the Supreme Court's decision were three considerations. First, the Supreme Court felt that imposing liability under the circumstances would frustrate the statute's purpose. Section 6672 promotes the full collection of taxes. Confronting potential rescuers of a failing institution with the Hobson's Choice of either assuming personal liability for the back taxes or finding the money to satisfy the tax debt in full before conducting any business actually increases the risk of non-collection. Id. at 252-53, 98 S.Ct. at 1787-88. Buyers capable of resuscitating the company would be scared off, consigning the business to collapse and the IRS to bankruptcy court to collect its money. Relieving new management from personal liability, on the other hand, would provide the financial breathing room necessary for new officers to get a business back on its feet. Once recovered, the company not only could pay its tax debt, but also could contribute additional tax revenue in the future. 28 Second, the Supreme Court found the tax code's language and legislative history inconsistent with a penalty theory that imposed liability without personal fault. Id. at 254, 98 S.Ct. at 1789. After-acquired funds, the Court continued, were not automatically impressed with a trust for the benefit of the government. Id. Rather, some nexus between the funds collected and the trust created must be established. Id. at 256, 98 S.Ct. at 1789-80. For new management, no such nexus exists. 29 Finally, the Court held that a rule automatically requisitioning all after-acquired cash for the federal Treasury would conflict with the priority rules creating a preferred status for some creditors over federal tax liabilities. See 26 U.S.C. § 6323. Responsible persons who paid these preferred creditors before paying back taxes might be deemed liable under section 6672 for diverting funds from the company's trust fund tax repayment obligation. Surely, the Supreme Court explained, Congress did not intend § 6672 to hammer the responsible person with the threat of heavy civil and criminal penalties to pay over proceeds in which the [Internal Revenue] Code does not assert a priority interest. 436 U.S. at 259, 98 S.Ct. at 1791. 30 Davis would have this court extend Slodov to hold that the use of after-acquired funds to pay commercial debts by the same persons who were responsible for the failure to collect and pay the withholding taxes in the first instance (as opposed to new management) does not give rise to liability under section 6672. We decline Davis's invitation for three reasons.
31 First, the Slodov opinion specifically excludes from its ambit Davis's situation, limiting its holding to cases involving the accession of new management: 32 When the same individual or individuals who caused the delinquency in any tax quarter are also the responsible persons at the time the Government's efforts to collect from the [corporate] employer have failed, and it seeks recourse against the responsible employees, there is no question that § 6672 is applicable to them. It is the situation that arises when there has been a change of control of the employer enterprise, here corporations, prior to the expiration of a tax quarter, or at a time when a tax delinquency for past quarters already exists that creates the question for our decision. 33 Id. at 245-46, 98 S.Ct. at 1784 (emphasis added; footnote and citation omitted). 34 While Davis says that he was unaware of ITAC's dereliction until the trust fund taxes were overdue, the district court properly instructed the jury that responsibility is a matter of status, duty, and authority, not knowledge. Thibodeau v. United States, 828 F.2d 1499, 1503 (11th Cir.1987) (per curiam); Wood v. United States, 808 F.2d 411, 415 (5th Cir.1987); see also United States v. Vespe, 868 F.2d 1328, 1334 (3d Cir.1989). The jury found that Davis was a responsible person and, as such, his actions or inactions caused ITAC not to pay over the withheld taxes as required by law. Because Davis was responsible both at the time the taxes went unpaid and at the time the government sought to collect under section 6672, there is no question that § 6672 is applicable to [him]. Slodov, 436 U.S. at 246, 98 S.Ct. at 1784. 35 Davis counters that simply being responsible is not enough. He points out that Mr. Slodov was a corporate officer as of January 31, 1969--the day that payments for the last quarter of 1968 were due. Status as a responsible person, however, does not attach automatically to every officer engaged in fiscal management on the day the tax check must be written. Rather, liability as a responsible person attaches each time salaries are paid during the course of a quarter. As the employer withholds taxes from the employees, a contingent liability is created. The liability merely becomes fixed on the date when the payments are due. Teel, 529 F.2d at 906; see Maggy, 560 F.2d at 1375 (holding that Maggy was a responsible person for that portion of the quarter during which he actually exercised control over corporate disbursements; that Maggy was not technically still a responsible officer on the day payment was due did not expunge his liability for the earlier portion of the quarter); United States v. De Beradinis, 395 F.Supp. 944, 951 (D.Conn.1975) (The obligation of a responsible officer arises at the time the taxes are withheld from wages, not at some subsequent time when payment is due or the return is to be filed.), aff'd mem., 538 F.2d 315 (2d Cir.1976). Mr. Slodov, unlike Davis, had no role in the corporation at the time the taxes were withheld and salaries disbursed. Nor did the corporation have any funds available with which to pay the tax when Slodov arrived on January 31st. 36 Davis, by contrast, did not simply appear on the eve of tax payment day. To the contrary, his status and role in the corporation made him a responsible person from the day the first salary was paid in the last quarter of 1981. Moreover, Davis has made no showing that corporate funds did not exist with which to satisfy the tax liability on the payment due date. He contends only that the funds actually withheld had been disbursed by this time. This is insufficient to invoke the protection of Slodov.
37 Second, the three considerations on which the Slodov opinion was predicated do not obtain in this case. Davis claims that, once he learned that ITAC was not paying employees' withholding taxes, he assumed a more active role in supervising corporate disbursements. He contends that the factors animating the Slodov decision with respect to new management apply with equal force to the shuffle of duties that took place at ITAC. In other words, Davis would have this court equate transfers of responsibility internal to the corporation with the accession of new management that occurred in Slodov. The Supreme Court's analysis, however, will not support such a conclusion. 38 In Slodov, the Supreme Court expressly counselled against interpreting section 6672 in such a manner that the penalties easily could be evaded by changes in officials' responsibilities prior to the expiration of any quarter. 436 U.S. at 247, 98 S.Ct. at 1785. Davis's theory would encourage corporate roulette. Responsible officers, upon learning that taxes had gone unpaid during their watch, could simply rotate their respective responsibilities and duties. Once the officers assumed their new duties, they would be relieved from section 6672 personal liability for the use of forthcoming revenues to pay debts other than the back taxes. The corporation could thus delay compensating the federal treasury for the use of its money indefinitely, thereby freeing up corporate income for more self-interested expenses. 39 Slodov's concern for encouraging new management to salvage failing businesses, thus maximizing the chances for tax recovery, also loses much of its luster in this context. Persons contemplating assuming control of a financially beleaguered corporation owing back employment taxes, Id. at 252-53, 98 S.Ct. at 1787-88, might be deterred by the risk of personal liability. While Davis suggests that he and other responsible officers, just like potential purchasers, have the option of just walking away when they learn of an accrued withholding tax liability, in reality the choice for existing management is not that simple. Existing management has a vested interest, financial and otherwise, in guiding a business through troubled waters. Legal obligations and duties limit an officer's ability to walk away upon learning of an overdue tax liability. Indeed, for responsible persons, leaving is no guarantee that liability will still not attach. A jury or judge could disbelieve protestations of ignorance or find that the officer acted recklessly or was willfully ignorant of the failure to pay taxes. See Teel, 529 F.2d at 905. Existing management like Davis, in other words, has sufficient incentive to remain and to keep the company afloat and capable of repaying taxes without specifically excepting them from section 6672 liability. 40 Slodov's insistence on personal fault is also satisfied in this case. Unlike Mr. Slodov, Davis presided over the corporation every day during which taxes were taken from employees' checks and dissipated to satisfy corporate needs, at the expense of the public fisc. The jury found that, throughout these three quarters, Davis had the authority and responsibility to prevent this breach of trust, but failed to do so. 3 While the briefs do not trace the expenditure of the trust funds, Davis at least indirectly benefited from the illicit diversion of the federal government's money. Bills and salaries (including Davis's) were paid and the company kept afloat for three quarters. That might not have been possible without the use of the tax revenues. A much stronger foundation for personal fault thus exists for Davis than for new management like Mr. Slodov. 41 Concerns about priority rules also have no practical application in this case. Davis has made no showing that any of the creditors he preferred to the IRS held debts given a priority by the tax code. See 26 U.S.C. § 6323. We thus leave for another day the question whether section 6672 liability attaches when existing management uses after-acquired funds to pay only debts having priority over a tax lien. With respect to otherwise unencumbered corporate income, the obligation to repay the taxes remains intact. 42 Finally, it should be noted that Slodov was concerned with the situation where, when new management assumes control, the business has no funds at all available to alleviate its tax debt. While Davis points out that the trust funds were dissipated prior to the time he learned of the delict, he makes no showing that there were no funds with which to satisfy the tax obligation. 436 U.S. at 259-60, 98 S.Ct. at 1791-92. It is unclear from the Supreme Court's opinion how critical a factor the impoverishment of the business is, other than that the total unavailability of cash and liquid assets makes the revival of the business through commercial expenditures much more urgent and the threat that the IRS will be unable to collect due to a bankruptcy much more immediate. To the extent ITAC was in a more solvent financial condition, it had less of an excuse to prefer commercial creditors over the IRS.
43 The third reason we refuse to extend Slodov to Davis's situation is that Davis's proposed interpretation of Slodov has been implicitly foreclosed by two of our previous decisions and expressly rejected by four other federal courts of appeals. In two decisions pre-dating Slodov, we held that the use of after-acquired funds to compensate debtors other than the United States amounts to willfulness. In Teel, the responsible corporate officers first learned of the business's failure to pay on October 17, 1966. After October 17th, the same officers knowingly used incoming cash to purchase new merchandise. The Ninth Circuit observed: 44 The [purchase] agreement seems sensible and honest. But the trouble is that as the cash went into the cash drawer, it became subject to trust or lien in favor of the federal government for the unpaid withholding taxes. By dissipating the cash for new purchases, of which the taxpayers knew, they unwittingly supplied the necessary willfulness. Because the failure to pay the arrearages and current tax after October 17, 1966, was willful, any factual issue as to ignorance of nonpayment prior to October 17, 1966, is not material. 45 529 F.2d at 905-06. 46 Likewise in Maggy, we held that a responsible officer's failure to use funds received by the business to repay its tax liability constituted willfulness because the funds which came into the corporation became immediately subject to a trust or lien in favor of the United States for the unpaid withholding taxes. 560 F.2d at 1375-76. 47 Davis attempts to distinguish these cases on two grounds. He argues firstly that Teel's and Maggy's reliance on a trust fund theory is outmoded in light of Slodov's admonition that [n]othing whatever in § 6672 ... suggests that the effect of the requirement to 'pay over' was to impress a trust on the corporation's after-acquired cash. 436 U.S. at 254, 98 S.Ct. at 1789. 48 While Slodov might quarrel with some of Teel's and Maggy's phraseology, we nevertheless consider our previous opinions' analyses sound and their bottom-line conclusions consistent with Slodov. Applying the appellation trust to Teel's and Maggy's after-acquired funds was simply a shorthand acknowledgment of the obligations section 6672 imposes on persons who (unlike Slodov ) are responsible when the taxes are collected, when the funds are dissipated, and when subsequent corporate income is diverted to creditors other than the United States. Slodov recognizes this distinction when, at the outset of its opinion, the Supreme Court contrasts Slodov's circumstances with the situation where the same corporate officers who prefer other creditors to the federal treasury were responsible before, during, and after dissipation of the withheld taxes. 436 U.S. at 245-46, 98 S.Ct. at 1784-85. In the latter case, the Supreme Court said there is no question that § 6672 is applicable to them. Id. at 246, 98 S.Ct. at 1784; see also Mazo v. United States, 591 F.2d 1151, 1154 (5th Cir.) (Slodov implicitly affirms [Teel's and Maggy's] conclusions because the [Supreme] Court assumes at the outset that a penalty may be exacted from a person who was responsible both during the period withholding tax liability accrued and thereafter), cert. denied, 444 U.S. 842, 100 S.Ct. 82, 62 L.Ed.2d 54 (1979). 49 Moreover, the Supreme Court's concern with imposing a trust on all after-acquired funds under all circumstances was that such a theory gave insufficient heed to the necessary nexus between the payment obligation and the after-acquired funds. See Slodov, 436 U.S. at 256, 98 S.Ct. at 1789-90. In Davis's case, his continuing responsibility before, during, and after the tax delinquency creates the requisite linkage between subsequently received cash and a duty to satisfy the trust fund tax delinquency. 50 Davis also tries to sidestep Teel and Maggy by pointing out that the responsible officers there learned of the tax delinquency before the actual payment due date and thus were under an absolute obligation to use any and all corporate funds to pay the taxes on time. Davis insists that he remained in the dark until after the money was due. Assuming the jury believed Davis's claim of ignorance, Davis still fails to explain why this timing factor should be critical. What is key in Teel and Maggy is that (1) the officers were in responsible positions at the time the taxes were or should have been collected and at the time trust moneys were dissipated, and (2) they ignored their obligations as responsible officers, knowingly and willfully diverting after-acquired cash to commercial creditors instead of paying the United States. Like Teel and Maggy, Davis's status and authority throughout the quarters, not his state of mind, made him a responsible person. As in Maggy and Teel, Davis's actions after he learned of the tax debt are what constituted willfulness. The arrival of a payment date, after all, does not by itself impose liability. It simply marks the fruition of liability--that is, responsibility--accumulated throughout the quarter as salaries were paid and/or trust funds dissipated. See Maggy, 560 F.2d at 1375; Teel, 529 F.2d at 906; De Beradinis, 395 F.Supp. at 951. Similarly, a person may still be deemed responsible for a quarter's tax payment even if she no longer holds a responsible position when the payment date arrives. See Slodov, 436 U.S. at 247, 98 S.Ct. at 1785; Brown v. United States, 591 F.2d 1136, 1140 (5th Cir.1979). 51 Numerous federal courts of appeals have followed Teel's and Maggy's holdings in the post-Slodov era, specifically rejecting in the process the argument Davis now proffers. In Mazo, the Fifth Circuit refused to extend Slodov to cases [w]here there has been no change in [corporate] control. 591 F.2d at 1154. The Fifth Circuit emphasized that the Supreme Court specifically limited Slodov to the expenditure of funds acquired after new management's  'accession to control.'  Id. (quoting Slodov, 436 U.S. at 259, 98 S.Ct. at 1791). Concluding that neither Slodov's language nor its rationale applied to continuing management, the Fifth Circuit held: 52 In the case of individuals who are responsible persons both before and after withholding tax liability accrues, as the appellants were in this case, there is a duty to use unencumbered funds acquired after the withholding obligation becomes payable to satisfy that obligation; failure to do so when there is knowledge of the liability, as was the case here, constitutes willfulness. 53 591 F.2d at 1157; see also Wood, 808 F.2d at 415-16 (Because ... Wood was a responsible person both before and after the obligations at issue accrued, Slodov is not applicable, even though Wood assumed new job responsibilities upon learning of the tax deficiency). 54 All of the other circuits presented with Davis's argument unanimously have limited Slodov to changes in management control. Quick on Mazo's heels came the Eighth Circuit's opinion in Kizzier v. United States, 598 F.2d 1128 (8th Cir.1979), holding: 55 Although Kizzier did not become aware of Titan's 1973 tax delinquency until March 1974, he was a responsible person within the meaning of section 6672 through all the calendar quarters. Titan failed to pay over employment taxes to the Government. As such, Kizzier's responsibility to pay Titan's withheld employment taxes extended to unencumbered funds received by the corporation after Kizzier learned of Titan's tax delinquency. 56 Id. at 1134. 57 The Seventh Circuit followed suit:Slodov does not relieve a responsible person of the responsibility to reduce accrued withholding tax liability with funds acquired after the funds actually withheld have been dissipated so long as the person responsible has been so throughout the period the withholding tax liability accrued and thereafter. 58 Garsky v. United States, 600 F.2d 86, 91 (7th Cir.1979); see also Purdy Co. v. United States, 814 F.2d 1183, 1188 (7th Cir.1987). 59 The Third Circuit rounded out the circle in Vespe: 60 One who was a responsible person when taxes were incurred, and who only later becomes aware that they were not paid, acts willfully by then paying other creditors in preference to the United States, even if the money specifically withheld has been dissipated. 61 868 F.2d at 1335; see also id. at 1334 n. 7; cf. Thibodeau, 828 F.2d at 1506 (preferring other creditors over the United States prior to payment due date demonstrates willfulness); Caterino v. United States, 794 F.2d 1, 6 (1st Cir.1986) (Any responsible person who knows the taxes are not paid and allows the business to pay other creditors acts willfully.), cert. denied, 480 U.S. 905, 107 S.Ct. 1347, 94 L.Ed.2d 518 (1987).