Opinion ID: 221252
Heading Depth: 2
Heading Rank: 3

Heading: Conway Acted Willfully

Text: Conway also disputes that his failure to pay over the taxes was willful. A responsible person acts willfully if he knows the taxes are due but uses corporate funds to pay other creditors or he recklessly disregards the risk that the taxes may not be remitted to the government. Logal, 195 F.3d at 232. When a responsible person becomes aware of tax liability, he has a duty to ensure that the taxes [are] paid before any payments [are] made to other creditors. Barnett, 988 F.2d at 1457. Where there is undisputed evidence that the responsible person directed payments to other creditors while knowing of the tax deficiency, willfulness is established as a matter of law. Id.; see also Howard v. United States, 711 F.2d 729, 736 (5th Cir.1983) (A considered decision not to fulfill one's obligation to pay the taxes owed, evidenced by payments made to other creditors in the knowledge that the taxes are due, is all that is required to establish willfulness.). However, evidence that the taxpayer acted with reasonable cause can sometimes defeat a finding of willfulness. See Howard, 711 F.2d at 736 (The failure to remit taxes under section 6672(a) is not willful if the taxpayer can produce a `reasonable cause' for this failure.); Newsome, 431 F.2d at 746. [T]o further the basic purposes of section 6672, reasonable cause should have a very limited application. Newsome, 431 F.2d at 747 (internal citations omitted); see also Logal, 195 F.3d at 233 (`[A]lthough we have recognized conceptually that a reasonable cause may militate against a finding of willfulness, no taxpayer has yet carried that pail up the hill.' (internal citation omitted)). Conway knew no later than January 19, 2001, when National filed a bankruptcy schedule reflecting the unpaid taxes, that the pre-petition excise taxes had not been paid. As to the post-petition taxes, Conway knew that they had not been paid no later than January 15, 2002, when he signed a request for an extension of time to pay over the taxes. National Airlines made payments in excess of $220 million to creditors between February 2002 and November 2002, far more than the approximately $8 million in unpaid excise taxes at issue in this case. Thus, in the absence of reasonable cause, Conway's willfulness is established as a matter of law, and summary judgment on the issue is proper. Conway raises several arguments to establish reasonable cause for his failure to pay over the taxes. He argues that: (1) he relied on the advice of counsel not to pay over the taxes, and thus had reasonable cause; (2) the Stabilization Act justified National's post-petition failure to pay even past the deadline set by the Act; (3) National lacked the unencumbered funds to pay the taxes; and (4) he believed that National had fully paid the excise taxes and otherwise lacked intent to avoid paying over the taxes. Conway also argues that the district court conflated National's tax liability with his personal liability for the taxes. For the reasons discussed below, these arguments are not persuasive.
Conway's primary argument on appeal is that his failure to pay over the taxes was based on reliance on the advice of counsel, and thus he had reasonable cause. The advice of counsel may constitute reasonable cause under some circumstances. Compare Newsome, 431 F.2d at 748 n. 12 (The term `reasonable cause' has been interpreted as advice by counsel under certain circumstances not to pay the withheld taxes as they became due, advice of non-collection by attorney and tax collector, [and] advice by counsel that there was no tax liability. (internal citations omitted)) with Logal, 195 F.3d at 233 (No [reasonable cause] defense may be asserted by a responsible person who knew that the withholding taxes were due, but who made a conscious decision to use corporate funds to pay creditors other than the government.). However, cases in which the taxpayer's reliance on the advice of counsel was found to have provided reasonable cause have been cases in which the advice of counsel tended to negate an element of willfulness under section 6672. See Gray Line Co. v. Granquist, 237 F.2d 390, 395 (9th Cir.1956) (noting that taxpayer relied upon advice from counsel that no taxes were owed); Anderson v. United States, No. 19303, 1977 WL 1252, at -4, 1977 U.S. Dist. LEXIS 13860, at -10 (W.D.La. Sept. 22, 1977) (noting that the taxpayer relied on the advice of counsel to structure bankruptcy estate to prefer the Government to other creditors). Conway has not raised a material fact issue supporting a finding that his reliance on counsel's advice provided reasonable cause so as to negate willfulness. Regarding National's pre-petition taxes, the only advice of counsel found in the record is Chief Financial Officer Ray Nakano's statement that National's bankruptcy counsel advised National to close its then current bank accounts and open new ones as a debtor in possession. As a result of National's following of this advice, the checks sent to the IRS were not paid (though there is no indication counsel knew of this consequence). Such advice is not the equivalent of advice that the taxes were not owed, and thus does not constitute reasonable cause for purposes of § 6672. See Newsome, 431 F.2d at 747-48 ([The taxpayer] was not advised, nor did he interpret the advice as meaning, that he had been justified in using withheld taxes during December and January to pay other creditors or that he should continue to pay creditors with funds then available ... instead of paying the government.). Therefore, Conway has failed to put forward any evidence that National relied on counsel's advice so as to have reasonable cause for its failure to pay the pre-petition taxes. Similarly, there is no evidence in the record that National's failure to pay its post-petition taxes was due to reliance on the advice of counsel. Conway's reference to a few vague and conclusory statements of reliance in the record falls far short of pointing to specific substantive evidence that would support a conclusion that the taxes were not owed. While there is some evidence that counsel told management what debts to pay, no evidence suggests that counsel advised that preferring other creditors would not subject National's officers to personal liability for the excise taxes. See Newsome, 431 F.2d at 748 (holding that an attorney's advice to execute a chattel mortgage in favor of the taxpayer's bank did not provide reasonable cause where the attorney did not advise [the taxpayer] that he could prefer the bank over the United States without subjecting himself to section 6672 liability). Nor is there evidence of any specific attorney stating that excise taxes were simply not owed. At best for Conway, the advice of counsel argument requires that the responsible person actually and reasonably rely on advice that is actually given. Cf. United States v. Boyle, 469 U.S. 241, 252, 105 S.Ct. 687, 83 L.Ed.2d 622 (1985) (The failure to make a timely filing of a tax return is not excused by the taxpayer's reliance on an agent, and such reliance is not `reasonable cause' for a late filing under § 6651(a)(1).). In light of the undisputed evidence that Conway knew the taxes were due and continued to favor other creditors, as well as our precedents establishing the exceedingly limited nature of the reliance on counsel as reasonable cause defense, we hold that Conway has failed to put forward evidence of his reliance on the advice of counsel such as would establish reasonable cause under § 6672.
Conway argues that even if personal liability would normally attach under these circumstances, the court should find that this case is extraordinary because of the September 11 terrorist attacks and the subsequent Stabilization Act. Generally, it is not a defense to liability under § 6672 that payment of the collected taxes would threaten the continued existence of the business entity. See Bowen v. United States, 836 F.2d 965, 967 (5th Cir.1988) (stating that the taxpayers' use of the collected taxes for other corporate expenses made the United States `an unwilling joint venturer in the corporate enterprise' (internal citations omitted)); see also Mazo, 591 F.2d at 1154 ([I]f a corporation has only sufficient cash to pay net wages, and does so, there may literally be no funds to constitute the corpus of the trust, but the responsible persons are nevertheless liable for failure to collect the withholding taxes.). Conway argues, however, that the Stabilization Act authorized National to use the withheld taxes as working capital. We disagree. Nothing in the plain language of the Act evinces an intent to allow the airlines to use the excise taxes as working capital. By the plain terms of the Stabilization Act, its effect was to allow airlines to defer paying over the collected excise taxes until January 15, 2002, as authorized by the IRS. Because these taxes are collected from passengers, and were not intended to become the property of National, more than a mere statutory deferral of payment would be required to evince an intent to allow the collected taxes to be used for operational purposes. Because the plain language of the statute is unambiguous, we need not examine the legislative history. [7] Similarly, nothing in the act demonstrates congressional intent to render payment of the excise taxes beyond the ordinary course of business.
Conway also argues that his failure to pay over the taxes was not willful because National lacked the unencumbered funds to pay the excise taxes after they became due and because he believed that payment for the taxes had successfully been arranged at the time that he left National. Conway has the burden of raising a fact issue that would support a conclusion that the funds paid to other creditors were encumbered. See Barnett, 988 F.2d at 1458 (We next observe that the burden to prove that the loan proceeds and accounts receivable deposited into the Company's bank accounts ... were `encumbered' falls on [the taxpayer.]). In this circuit, funds are encumbered when restrictions preclude a taxpayer from using the funds to pay the trust fund taxes. Id.; see also Honey v. United States, 963 F.2d 1083, 1090 (8th Cir.1992) ([F]unds are encumbered only where the taxpayer is legally obligated to use the funds for a purpose other than satisfying the preexisting employment tax liability and if that legal obligation is superior to the interest of the IRS in the funds.). However, as the district court found, Conway has submitted no evidence that the funds paid to other creditors had a legal priority over the unpaid excise taxes. Therefore, Conway has not met his burden of raising a fact issue on encumbrance. Conway also argues that he did not act willfully in regard to the pre-petition taxes because, at the time he left National, he believed he had arranged for those taxes to be paid. Noting that corporate officers have a duty to ensure that payment is made, we have repeatedly rejected the argument that a taxpayer's good faith belief that payment for the taxes had been arranged is a defense to personal liability under § 6672. See Mazo, 591 F.2d at 1157; see also Bowen, 836 F.2d at 968 (finding that a taxpayer acted willfully despite the taxpayer's good faith belief that it would be able to obtain a loan to pay over the tax liabilities). While Conway may have had earnest intentions to pay back the taxes, willfulness does not require an intent to defraud or to deprive the United States of taxes. See Gefen v. United States, 400 F.2d 476, 482 n. 7 (5th Cir.1968). As discussed above, it is sufficient that other creditors were consciously preferred to the United States. Id. Finally, Conway's argument that the district court conflated National's tax liability with Conway's personal liability is frivolous in light of the district court's proper conclusion that Conway was a responsible person and that he willfully failed to pay over the taxes. [8]