Opinion ID: 583422
Heading Depth: 2
Heading Rank: 2

Heading: the relationship between being a responsible person, being willful, and unencumbered funds

Text: 16 The taxpayers argue that they are liable only to the extent of the unencumbered funds in existence on October 31, 1985 and not for any funds acquired by Phoenix after October 31, 1985. However, the taxpayers have not challenged the district court's ruling against them on this issue by filing a cross-appeal. We discuss this issue solely for the purpose of lending meaning to our later discussion of the definition of unencumbered funds under the facts of this case. 17 The taxpayers cite to Slodov v. United States, 436 U.S. 238, 98 S.Ct. 1778, 56 L.Ed.2d 251 (1978), wherein the United States Supreme Court rejected the government's argument that a trust to pay the preexisting tax liabilities was imposed on all cash received by the corporations after a taxpayer assumes control of a corporation and becomes both responsible and willful. 18 [A] responsible person under § 6672 may violate the pay over requirement of that statute by willfully failing to pay over trust funds collected prior to his accession to control when at the time he assumed control the corporation has funds impressed with a trust under § 7501, but that § 7501 does not impress a trust on after-acquired funds, and that 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 he 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. 19 Slodov, 436 U.S. at 259-60, 98 S.Ct. at 1791-92. 20 In Elmore v. United States, we applied Slodov and found that at the time Elmore simultaneously became both responsible and willful, the corporation's bank balance was positive but was encumbered by outstanding checks written prior to the time Elmore became both responsible and willful, and thus Elmore was not liable under § 6672. Elmore, 843 F.2d 1128, 1133 (8th Cir.1988). In Kenagy v. United States, we expanded upon this point: 21 A responsible person generally may not be penalized with respect to unpaid taxes accruing prior to the date s/he became a responsible person in an amount more than the unencumbered funds of the corporation in existence at that date. Unencumbered funds are those funds available after taking into account outstanding transactions. 22 Kenagy, 942 F.2d 459, 465 (8th Cir.1991) (citing Slodov and Elmore ). 23 However, the facts of Slodov, Elmore, and Kenagy are distinguishable from the facts of this case. Those cases look to the point in time at which the taxpayer became a responsible person and look to whether there were unencumbered funds available as of that date to pay the tax liability accrued prior to the time the taxpayer became a responsible person. If such unencumbered funds exist, the taxpayer is personally liable under § 6672 for the tax liability to the extent of any unencumbered funds used for any purpose other than satisfying that liability. 24 The facts of our decision in Kizzier are very similar to this case. Kizzier was the sole shareholder and the president and treasurer of Titan, a corporation. Kizzier was assessed under § 6672 for unremitted employment taxes for the last quarter of 1973 and the first three quarters of 1974. Kizzier was a responsible person throughout the entirety of this period. In March of 1974, Kizzier first learned that Titan had not remitted its previously withheld employment taxes to the IRS. Citing Mazo v. United States, 591 F.2d 1151 (5th Cir.), cert. denied, 444 U.S. 842, 100 S.Ct. 82, 62 L.Ed.2d 54 (1979), we held that 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. Kizzier, 598 F.2d at 1134. Olsen also involved a taxpayer who was both responsible and willful for the entirety of the period during which employment taxes were collected but not remitted. Olsen, 952 F.2d at 240-41. 25 In this case, the jury found that Honey and Meador were responsible persons during the entire time the employment tax liabilities accrued. The jury also found that Honey and Meador did not act willfully until after October 31, 1985. In making this latter finding, it is likely, based on the instructions given the jury, that the jury found that Honey and Meador were not aware of the failure to pay over the employment taxes withheld prior to October 31, 1985, until Meador took over the daily operations of Phoenix and were thus not willful prior to that date, but that Honey and Meador were willful after October 31, 1985, because they did not collect, account for, and pay over employment taxes accruing after that date. However, [e]vidence that the responsible person had knowledge of payments to other creditors, including employees, after he was aware of the failure to pay over withholding taxes is proof of willfulness as a matter of law. Olsen, 952 F.2d at 240. That aspect of willfulness was not submitted to the jury and was the issue reserved for the district court. The jury's findings are relevant to the question of when Honey and Meador had knowledge that the employment taxes had not been paid over and the question of whether Honey and Meador acted willfully with respect to employment tax liabilities accrued after October 31, 1985. The jury's findings are not dispositive of whether or not Honey and Meador acted willfully in failing to use unencumbered funds acquired after October 31, 1985, to satisfy the tax liability which had accrued prior to that date. The jury was not instructed on or asked to resolve the issue of whether Phoenix had unencumbered funds after October 31, 1985. 26 Since Honey and Meador were responsible persons when the employment tax liabilities accrued, we apply the following rule: 27 Thus, [i]n the case of individuals who are responsible persons both before and after the withholding tax liability accrues ... 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 ... constitutes willfulness. 28 Olsen, 952 F.2d at 240 (citations omitted). See also Thomsen v. United States, 887 F.2d 12, 17-18 (1st Cir.1989); Howard v. United States, 711 F.2d 729, 736 (5th Cir.1983). Slodov's holding regarding liability for failure to apply after-acquired funds to withholding taxes is limited to the situation of an individual becoming a responsible person after those taxes are payable and trust funds have been dissipated. Mazo, 591 F.2d at 1157. See also Kizzier, 598 F.2d at 1133-34; Davis v. United States, 961 F.2d 867, 871-78 (9th Cir.1992). Thus, Honey and Meador are liable under § 6672 to the extent that Phoenix used unencumbered funds after October 31, 1985, to pay creditors in preference of the IRS. 29 The taxpayers also cite to Matter of King, 91-2 U.S. Tax.Cas. (CCH) P50, 330, 68 A.F.T.R.2d (P-H) 5249, 1991 WL 281726 (Bankr.S.D.Ala.1991). Although King had been a responsible person throughout the entirety of the corporation's existence, the court concluded that he was liable for unpaid employment taxes only to the extent of the unencumbered funds in existence on the date he became willful by acquiring actual knowledge that the taxes had not been paid. King does not recognize that the key issue is when the taxpayer became a responsible person, not when the taxpayer acquired actual knowledge that employment taxes are not being remitted to the IRS. Accordingly, we do not find King persuasive. 30