Opinion ID: 221252
Heading Depth: 3
Heading Rank: 1

Heading: The Nature of Reasonable Cause

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.