Court Opinion

ID: 9474349
Source: CourtListenerOpinion
Date Created: 2023-08-05 04:55:19.450169+00
Date Added: 2024-06-11T17:44:02.524145
License: Public Domain

GODBOLD, Chief Judge,
concurring in part and dissenting in part:
I concur in the holding that the government was entitled to judgment n.o.v. for the statutory penalty arising out of failure of the corporation to pay over withheld taxes for the third quarter of 1977. I cannot agree that judgment n.o.v. was properly granted based upon failure to pay for the fourth quarter of 1977. Whether Roth is liable for the corporation’s failure to pay in the fourth quarter is an issue to be decided by a properly instructed jury.
The jury found, in response to interrogatories, that Roth was not “a person responsible to collect, truthfully account for and pay over income taxes and social security taxes withheld from the wages of the Corporation’s employees ending for the third quarter of 1977”, and made the same finding with respect to the fourth quarter. This court concludes, as a matter of law, that under the evidence Roth was a “person responsible” with respect to both quarters, and implicitly holds that the jury instruction quoted in its opinion concerning the effect of specific instructions given Roth by the president of the company was erroneous.
I. Was Roth a person responsible for payment of withheld taxes and for what period?
Roth was a corporate employee employed at will and charged with day-to-day operation of a small corporation engaged mostly in installing dry walls in construction jobs. He found work, supervised work, purchased materials, and paid for materials. The corporate bookkeeper kept him in*1573formed. He signed most checks, including salary checks. He signed the quarterly tax withholding forms (941’s) for the last two quarters of 1977.
Roth was not a director of the corporation but was designated as executive vice president. He was not even a stockholder. Dobbins, the president and chairman of the board, and his family owned all the stock. The by-laws vested management of the corporation in the board of directors, who must be stockholders, and general supervision of the business in the president. No one suggests that Roth was an alter ego. There is no proof that under the by-laws of the corporation the executive vice president had authority to handle or disburse funds. In short, Roth had authority to handle corporate funds because the corporation, through president Dobbins, conferred it upon him. He did not, either expressly or by implication, otherwise possess the authority to handle money.
The government has not even made an assessment against Dobbins.
Whether one is the person responsible so as to fall within § 6672 “is a matter of status, duty and authority, not knowledge.” Mazo v. U.S., 591 F.2d 1151, 1156 (5th Cir.), cert. denied sub nom., Lattimore v. U.S., 444 U.S. 842, 100 S.Ct. 82, 62 L.Ed.2d 54 (1979). Roth enjoyed status and authority until late August, when — the jury necessarily found — he was instructed by president Dobbins, who was in sole control of the corporation, not to pay out of corporate funds the corporation’s obligation for withheld taxes. To be a responsible person for a tax quarter, one need not be a responsible person at the end of the quarter so long as responsible during the quarter. Brown v. U.S., 591 F.2d 1136, 1140 (5th Cir.1979). Thus because Roth was a responsible person until late July, he is obligated for all of the July-September 1977 quarter.1 This continuation of authority to the end of the quarter, whether or not actually possessed to that time, vindicates the interest of the government that responsibility for a quarter may not be avoided by an intra-quarter shift of authority.2
Responsibility to pay the taxes for the October-December quarter presents a number of issues. Arguably, as a matter of law, a mere employee authorized to handle corporate funds by delegation from the president, and not otherwise authorized, ceases to be a responsible person once his delegated authority is removed (subject to his being responsible to the end of the quarter, pursuant to Brown). At a minimum, stripping such an employee of his authority to pay taxes before a quarter commences creates a jury issue of whether he continues to be a responsible person for the new quarter during which he had no actual authority to pay taxes. This court does not hold that Roth’s partial loss of authority was a sham. Rather it seems to say that, because he once had unlimited authority to disburse corporate funds, a limitation by the corporation, as a matter of law, could not relieve him of the responsibility imposed by the statute.
In applying § 6672 some recognition must be given to the law governing corporate affairs. The status and authority of a corporate employee can be withdrawn: if derived from the by-laws, by amendment; if implied from office, by removal; and if conferred through delegation, by withdrawal. Presumably if the president had fired Roth in August, this court would not have held that he was a responsible person for the October-December quarter. Presumably, also, the same result would be reached if in August the corporation removed Roth’s authority to handle corporate funds in any respect. The corporation em*1574ployee cannot do more than he can do, and § 6672 is not intended to hold him liable for failure to exercise authority he does not have, or, even if he has it, when his failure is not willful. Roth had authority to sign checks. This is a “significant factor because it generally comes with the ability to choose which creditors will be paid.” Burack v. U.S., 461 F.2d 1282, 198 Ct.Cl. 855 (1972). In this case, after late August, Roth did not have the ability to choose.
The majority rely upon Howard v. U.S., 711 F.2d 729 (5th Cir.1983) (not binding). But Howard had “status, duty and authority,” because he was a director, minority stockholder, treasurer, and executive vice president of the corporation, in addition to running its day-to-day operations. The status, duty and authority he possessed as treasurer and executive vice president continued during the periods in question. Presumably the chief executive officer had no authority to tell Howard as treasurer not to perform his duties as treasurer. The Fifth Circuit found: “Howard had the status, duty and authority to pay the taxes owed, and would only have lost that authority after he paid them.”3 In this ease, a jury can find that Roth had no authority to pay taxes once that authority was withdrawn.
Two other Fifth Circuit cases emphasized by the government also are distinguishable. In Mazo, supra, the taxpayer was the general manager of the corporation, and his authority to sign checks or to use corporate funds to pay taxes was never removed. His defense was that he thought the controller was paying the taxes. In Moore v. U.S., 465 F.2d 514 (5th Cir.), cert. denied, 409 U.S. 1108, 93 S.Ct. 907, 34 L.Ed.2d 688 (1973), taxpayers were corporate officers and a majority of the board of directors who, the court held, had ultimate authority over the expenditure of funds.
There is not a dearth of authority on the specific point that the court recognizes is presented by this case — the extent to which corporate employees who are under the direction of corporate officers are responsible persons. In Geiger v. U.S., 583 F.Supp. 1166 (D.Ariz.1984), Geiger was a consultant who exercised an unusual degree of influence and control over a corporate business. Also, though he was not a shareholder, officer or director, he was authorized to sign checks, and did so, and assigned accounts receivable to a bank using the title of acting president. After a non-jury trial, the court found that he was not a responsible person. It distinguished Howard:
Although defendant maintains that plaintiff was in a position of responsibility for the acts giving rise to the violation in the instant case, in the recent decision of Howard v. United States, 711 F.2d 729 (5th Cir.1983), where a “subservient” person was held to have a duty to pay withheld taxes, the “person” there was a substantial shareholder, director, and executive vice president of the corporation. This Court is convinced that plaintiff has shown that although he signed the checks he did so only at the behest and direction of Mr. Kennedy, in the latter’s capacity as president of Standard, and therefore, plaintiff lacked the “final word” as defined in United States v. Graham [309 F.2d 210 (9th Cir.1962)], supra, and in Pacific National Insurance v. United States, 422 F.2d 26 (9th Cir.1970).
Id. at 1168-69.
Klotz v. U.S., 602 F.2d 920 (9th Cir.1979) is similar to the present case. Klotz was director, secretary-treasurer, and purchasing agent for a corporation and one of two joint signatories required for corporate checks. The corporation failed to pay its withholding taxes for the third and fourth quarters of 1969 and collapsed in January 1970. Persons who lent money to the cor*1575poration began to take over its affairs, and their representative was added as a signatory to the bank account. Klotz fell out with the president, Howe. In mid-August 1969 his authority to sign checks was removed. He was “effectively” out of the corporation by the end of August and resigned in late October. The district court held that the lenders entirely controlled the corporation’s finances, that neither Howe nor Klotz was a responsible person and that neither was willful. On appeal the Ninth Circuit found it unnecessary to reach the responsible person issue but affirmed on the ground that neither Klotz nor Howe was willful because under the facts neither was any more than negligent.
In the present case, the reasoning of the court is essentially circular and stands the statutory scheme on its head: “Because Roth has status and authority he is a responsible person and therefore bound to pay; his status and authority cannot be terminated because as a responsible person he is bound to pay.” Responsibility to pay during the fourth quarter is an inference that must be drawn from status and authority, not the contrary. The “burdened with a trust” rationale is likewise circular: “For the fourth quarter the corporation held funds impressed with a trust in favor of the government; therefore Roth is a person responsible because he failed to carry out the trust obligations.” Again, responsibility to pay must derive from status and authority, not status and authority from responsibility to pay.
Roth’s lack of authority during the last quarter is demonstrated by the evidence that in October Dobbins took over in toto the affairs of the corporation.4 Roth’s pay stopped in late November, although he performed some duties for the corporation until early 1978.
II. Willfulness and “reasonable cause”
Willfulness is a required element for liability for the § 6672 penalty. Once one is found to be a responsible person, the burden of proving lack of willfulness is on him. Mazo, 591 F.2d at 1155. For this statute, willfulness is a voluntary, conscious and intentional act, or acting with a reckless regard of a known or obvious risk. Id. at 1154. It is “the state of the responsible person’s mind, a subjective determination,” Id. at 1157. Roth came forward with evidence to create a jury issue. Even if he continued to enjoy corporate status and authority to pay taxes during the fourth quarter despite the instructions of the president, it is for a properly instructed jury to decide whether — bearing in mind what Dobbins told him — Roth’s failure to exercise his status and authority was willful. There was no separate jury instruction on willfulness because, as was recognized during the charge conferences, the instruction given on the effect of directions to Roth from president Dobbins contained its own instruction on willfulness.5
Cellura v. U.S., 245 F.Supp. 379 (N.D. Ohio 1965) is parallel to the present case. Plaintiff was hired as manager of a restaurant. It was in serious financial difficulty and operating on a cash basis. As soon as funds were deposited in its bank account they were withdrawn so that they could not be attached. The sole stockholder and president of the corporation gave plaintiff instructions on the priority of creditors to be paid. He told her that her prime concern was to keep the restaurant operating and pay trade creditors ahead of all others. Tax liabilities were to be paid when there was money available to do so. Plaintiff carried out these instructions. Some funds were available for payment to the government, plaintiff paid the available funds over and they were applied against delinquent withholding obligations. The district court found that plaintiff was not liable under § 6672 because she did not act willfully:
*1576On the state of this record the Court finds that plaintiff does not come within the scope of 26 U.S.C. §§ 6671(b) and 6672. Plaintiff’s authority was limited to paying bills under the general instructions of her employer. While plaintiff did not have to check with her employer as to payment of a particular bill, she had instructions as to the priorities of classes of creditors, and under such instructions the Internal Revenue was at the end of the list.
The Court finds that plaintiff had no authority to pay taxes ahead of trade creditors, and the decision to prefer trade creditors over Internal Revenue originated with her employer, and not with the plaintiff. The Court further finds that there is no evidence that plaintiff on her own accord failed to pay taxes to the Internal Revenue when excess funds were available.
Id. at 382. A jury could reach a similar conclusion here. See also, Klotz v. U.S., supra, distinguishing negligence from willfulness.
As the case stands the government has a judgment for the fourth quarter without determination by a factfinder that Roth acted willfully with respect to that quarter. Failure to exercise authority is not necessarily willful when one has no express or implied authority from the corporation other than by direction of the president and thinks that his authority has been circumscribed. A jury might find that Roth’s “subjective determination,” see Mazo, was that he could not pay the taxes.
Finally, no factfinder has addressed the issue of “reasonable cause,” which may excuse a failure to collect, account for, or pay over withholding taxes. Mazo, 591 F.2d at 1155; Newsome v. U.S., 431 F.2d 742, 746 (5th Cir.1970). Under the circumstances of this case, reasonable cause is a jury issue. No instruction on reasonable cause was given or asked, presumably for the same reason set out above, that is, the plenary instruction that the jury “must find” that Roth was relieved of liability if he was prevented from paying taxes by specific instructions from the president of the company pretermitted the necessity for it.
I respectfully dissent.

. Under Roth’s own testimony neither willfulness nor "reasonable cause” for the period July 1 to late August was an issue. See Part II, below.

. Thus, under Brown, Roth would be liable for the third quarter even if Dobbins had fired him in August.

. Footnote 4 in Howard recognizes that a responsible person can have his authority removed. 711 F.2d at 734 n. 4.

. I have not been able to find in the record support for the majority’s statement that he resigned toward the end of the second quarter.

. See also, comment of the court in overruling objection, recognizing that willfulness was an issue. Majority opinion, 779 F.2d at 1569.