Court Opinion

ID: 2653665
Source: CourtListenerOpinion
Date Created: 2014-02-18 22:18:29.991587+00
Date Added: 2024-06-11T12:17:53.982087
License: Public Domain

FOR PUBLICATION

  UNITED STATES COURT OF APPEALS
       FOR THE NINTH CIRCUIT

RAYMOND T. NAKANO,                       No. 11-18013
            Plaintiff-Appellant,
                                          D.C. No.
               v.                    2:08-cv-01026-ROS

UNITED STATES OF AMERICA,
           Defendant-Appellee.            OPINION

     Appeal from the United States District Court
              for the District of Arizona
   Roslyn O. Silver, Senior District Judge, Presiding

                Argued and Submitted
     January 16, 2014—San Francisco, California

               Filed February 18, 2014

  Before: Diarmuid F. O’Scannlain, Susan P. Graber,
      and Jacqueline H. Nguyen, Circuit Judges.

               Opinion by Judge Graber
2                  NAKANO V. UNITED STATES

                           SUMMARY*

                                 Tax

    The panel affirmed the district court’s summary judgment
in favor of the government in a tax refund action after the
Internal Revenue Service assessed unpaid excise taxes against
plaintiff pursuant to 26 U.S.C. § 6672.

     Plaintiff, a former vice president and chief financial
officer of National Airlines, Inc., contended that his failure to
pay the excise tax was not “willful” under § 6672(a)—which
provides for personal liability for those required to collect
such excise taxes who willfully fail to transfer them to the
federal government—because of the airline’s bankruptcy.
The panel was unpersuaded by plaintiff’s contention that the
airline’s funds were encumbered by its bankruptcy
obligations, such that the failure to pay excise taxes was not
willful. The panel also was unpersuaded by plaintiff’s
contention that § 6672 liability does not apply to excise tax
payments deferred under the Air Transportation Safety and
System Stabilization Act, which gave airlines an opportunity
to defer transfer of the third-quarter 2001 excise taxes for a
few weeks in response to the terrorist attacks on September
11, 2001, but did not amend plaintiff’s obligation to hold
excise taxes in trust for the federal government under § 6672.

  *
    This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
                NAKANO V. UNITED STATES                       3

                         COUNSEL

Richard D. Salgado (argued) and Laura L. Gavioli, SNR
Denton US LLP, Dallas, Texas, for Plaintiff-Appellant.

Jennifer M. Rubin (argued) and Robert W. Metzler,
Attorneys, and Kathryn Keneally, Assistant Attorney
General, Tax Division, United States Department of Justice,
Washington, D.C., for Defendant-Appellee.

                          OPINION

GRABER, Circuit Judge:

    Plaintiff Raymond T. Nakano served as Senior Vice
President and Chief Financial Officer of National Airlines,
Inc. (“National”), from its founding in 1995 until it filed for
Chapter 7 bankruptcy in May 2003. The Internal Revenue
Service (“IRS”) assessed unpaid excise taxes against Plaintiff
personally, pursuant to 26 U.S.C. § 6672. He then brought
this civil action against the United States, pursuant to
26 U.S.C. § 7422, for a refund of taxes erroneously assessed.
The government filed a counterclaim for the unpaid balance
of the tax assessments. The district court granted summary
judgment to the government on both the claim and the
counterclaim.

    In considering this timely appeal, we address two
questions: (1) whether the district court erred in holding that
Plaintiff’s failure to pay the excise taxes was “willful” within
the meaning of 26 U.S.C. § 6672(a) despite the airline’s
bankruptcy and (2) whether § 6672 liability applies to excise
tax payments deferred under the Air Transportation Safety
4                 NAKANO V. UNITED STATES

and System Stabilization Act (“Stabilization Act”), Pub. L.
No. 107-42, § 301(a)(1) (2001). Reviewing those legal
questions de novo, Ilko v. Cal. State Bd. of Equalization (In
re Ilko), 651 F.3d 1049, 1052 (9th Cir. 2011) (order), we
affirm. We hold that: (1) assets are “encumbered” for
purposes of § 6672 only if “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,”
Honey v. United States, 963 F.2d 1083, 1090 (8th Cir. 1992),
a test that is not met here; and (2) the Stabilization Act does
not “allow the airlines to use the excise taxes as working
capital” and does not defeat trust status for unpaid excise
taxes for purposes of personal liability under § 6672, Conway
v. United States, 647 F.3d 228, 236 (5th Cir. 2011).

    Federal law requires all airlines to collect certain excise
taxes from passengers and to remit those taxes, held in trust,
to the federal government at quarterly intervals. 26 U.S.C.
§§ 4261, 4291, 7501. The airline passengers have original
liability for the excise taxes, but the airlines incur liability for
the taxes if they fail to transfer the trust funds on time.
Begier v. Comm’r, 496 U.S. 53, 55 (1990).

    National began flying passengers in 1999, but it did not
report a profit for any year during its operation. The airline
filed for Chapter 11 bankruptcy on December 6, 2000.
Shortly before that filing, National mailed to the IRS its
quarterly excise payment check for the third quarter of 2000,
in the amount of $1,832,501.01. The IRS received and
deposited the check but, before it could clear, National
restructured its accounts under Chapter 11 rules, and the
check was returned unpaid. National made no additional
                NAKANO V. UNITED STATES                      5

efforts to pay the quarterly excise taxes, but it did begin to
pay other excise taxes collected during the bankruptcy period.

    In response to the terrorist attacks on September 11, 2001,
Congress passed the Stabilization Act. Among many other
provisions, the Act gave airlines an opportunity to defer
transfer of the third-quarter 2001 excise taxes for a few weeks
after the usual due date. Stabilization Act § 301(a)(1). The
Act included a grant of discretionary authority to the
Secretary of the Treasury to further extend the third-quarter
2001 and fourth-quarter 2001 excise tax due dates until
January 15, 2002, an option that the Secretary exercised. Id.
§ 301(a)(1)(A). The Act also provided that airlines could
collect direct government grants. Id. § 101(a). National
received such a grant, in the amount of $21 million. It did not
pay excise taxes during the deferral period.

    On January 15, 2002, the deadline set by the IRS to
transfer excise taxes collected, National filed a return,
without enclosing payment, and requested a six-month
extension. National did not submit payment for those taxes
after requesting the extension, but it did submit payments and
returns for later quarters. On January 30, 2002, National
again filed a return for fourth-quarter 2001 excise taxes, but
again failed to submit any payment.

    Nine months later, National ceased operations and, on
May 7, 2003, the airline converted its bankruptcy to Chapter
7. On January 29, 2003, during Chapter 7 proceedings, the
IRS demanded that National remit unpaid excise taxes in the
amount of $11,572,151.91. Following an administrative
appeal of an earlier assessment, the government reissued
assessments against Plaintiff personally in the amounts of
$148,325.00, $3,497,448.32, and $4,803,626.85, for the
6                NAKANO V. UNITED STATES

taxable quarters ending September 30, 2000, September 30,
2001, and December 31, 2001, respectively, plus statutory
interest. Plaintiff paid a nominal amount of the assessments
and then filed an administrative refund claim, which the IRS
denied.

    Plaintiff then filed the present action in district court for
recovery of taxes paid and an abatement of the amounts
owing. The government counterclaimed for the amount
owing and followed with a motion for summary judgment.
Plaintiff moved to dismiss the government’s counterclaim.
The district court denied Plaintiff’s motion, granted the
government’s motion, and entered judgment for the
government in the amount of $11,553,586.11, which
represents the full amount due from all three quarters plus
statutory interest through November 30, 2011.

    An individual can incur personal liability under 26 U.S.C.
§ 6672(a) for unpaid excise taxes:

            Any person required to collect, truthfully
        account for, and pay over any tax imposed by
        this title who willfully fails to collect such tax,
        or truthfully account for and pay over such
        tax, or willfully attempts in any manner to
        evade or defeat any such tax or the payment
        thereof, shall, in addition to other penalties
        provided by law, be liable to a penalty equal
        to the total amount of the tax evaded, or not
        collected, or not accounted for and paid over.

To impose personal liability, the statute requires that the
individual (1) was “required to collect, truthfully account for,
and pay over the withholding taxes” (commonly known as a
                  NAKANO V. UNITED STATES                          7

“responsible person”) and (2) “willfully failed to meet one or
more of these obligations.” United States v. Sotelo, 436 U.S.
268, 274 (1978) (internal quotation marks omitted). In an
action to collect taxes, the government bears the initial
burden of proof. Oliver v. United States, 921 F.2d 916, 919
(9th Cir. 1990). The government satisfies its burden by
introducing evidence of the tax assessment under § 6672. Id.
The burden then shifts to the taxpayer to prove that he is not
liable. Id.

    On appeal, Plaintiff does not challenge the district court’s
finding that he is a “responsible person” for purposes of
§ 6672.1 But he does argue that his failure to pay over the
excise taxes was not “willful” under the second prong of the
Sotelo standard. In particular, Plaintiff asks us to adopt a rule
that the element of willfulness under § 6672 cannot be
satisfied by a failure to use “encumbered” funds to make
excise tax payments, Elmore v. United States, 843 F.2d 1128,
1133–34 (8th Cir. 1988), and to hold that National’s
bankruptcy obligations rendered all funds encumbered as a
matter of law for the purpose of analyzing willfulness under
§ 6672.

    In general, “[w]illfulness, within the meaning of § 6672,
has been defined as a voluntary, conscious and intentional act
to prefer other creditors over the United States.” Davis v.
United States, 961 F.2d 867, 871 (9th Cir. 1992) (internal
quotation marks omitted). Plaintiff does not dispute that his
preference for other creditors was voluntary, conscious, and
intentional. The failure to pay over the excise taxes was

 1
   Michael Conway, who was the founder, CEO, president, and chairman
of the board of National did argue, unsuccessfully, that he was not a
“responsible person.” Conway, 647 F.3d at 232–34.
8                NAKANO V. UNITED STATES

therefore “willful” unless Plaintiff’s legal argument prevails.
It does not.

    We have yet to define what renders assets encumbered
and thereby unavailable to support a finding of willful non-
payment of excise taxes under § 6672. See Purcell v. United
States, 1 F.3d 932, 938–39 (9th Cir. 1993) (declining to reach
the issue of what constitutes “encumbered funds” for § 6672
purposes). Every other circuit to have addressed the issue has
established a narrow rule that only a legal prohibition on the
expenditure of funds renders the assets encumbered.

    The leading case to take this view is Honey, 963 F.2d at
1089–90. There, the Eighth Circuit considered in detail what
funds are “encumbered” and “unencumbered” in this context.
The court examined the text of the statute, the sparse existing
precedents, and especially the purpose of § 6672. Id. The
court concluded that the purpose of the statute is to ensure
that the excise tax is paid and that the statute must be broadly
construed to permit the government to reach those who are
responsible for the corporation’s failure to pay the taxes
owed. Id. at 1090. The court distilled the applicable rule to
the following: “funds 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.” Id.

   Every other circuit to have considered the question agrees
with the Eighth Circuit’s analysis and definition. See Bell v.
United States, 355 F.3d 387, 394–95 (6th Cir. 2004)
(adopting the Honey definition); United States v. Kim,
111 F.3d 1351, 1359 (7th Cir. 1997) (same); Barnett v.
Comm’r, 988 F.2d 1449, 1458 (5th Cir. 1993) (same). In
                 NAKANO V. UNITED STATES                         9

Purcell, we noted a broader rule, offered by the Eastern
District of Michigan Bankruptcy Court, that encompassed
restrictions on assets imposed by a creditor, beyond those
imposed by law. 1 F.3d at 939 (citing In re Premo, 116 B.R.
515, 535 (Bankr. E.D. Mich. 1990)). But the Sixth Circuit
has since rejected that rule and has adopted explicitly the
Eighth Circuit’s narrower definition. Bell, 355 F.3d at 395;
see also Huizinga v. United States, 68 F.3d 139, 145 (6th Cir.
1995) (citing approvingly the Honey definition). We, too, are
persuaded by Honey and now adopt the quoted test as our
own.

    Applying that test, we conclude that Plaintiff failed to
satisfy his burden to show that the assets he had at his
disposal as a “responsible person” were “encumbered” and
thereby unavailable to satisfy his obligations under § 6672.
Purcell, 1 F.3d at 939. He argues that, because the excise
taxes were post-Chapter 11 petition taxes, 11 U.S.C.
§ 503(b)(1)(A)–(B) mandates that operating expenses take
priority over taxes due. We read the statute differently.
Section 503(b)(1)(A)–(B), by its clear terms, mandates
equally the payment of operating expenses and taxes.
Operating expenses do not gain a higher priority. In short,
the district court properly held that Plaintiff willfully failed to
pay over excise taxes that he was obligated to pay as a
responsible person.

    In addition to arguing that § 6672 liability was improperly
applied to him, Plaintiff challenges the applicability of § 6672
liability to all excise tax payments afforded a deferred due
date under the Stabilization Act. He offers two theories.
First, he contends that the Stabilization Act exempted
implicitly the deferred excise taxes from § 6672 liability by
directing that the collected taxes be used for other purposes,
10              NAKANO V. UNITED STATES

thereby undermining the taxes’ status as funds held in trust.
Second, Plaintiff relies on Slodov v. United States, 436 U.S.
238 (1978), for the principle that § 6672 liability cannot apply
where it would frustrate the purpose of a statute; in his view,
Congress intended that the deferred funds be used for
operational expenses. Neither theory avails Plaintiff.

    As a threshold matter, it bears noting that, although the
Fifth Circuit was not presented with arguments identical to
those offered by Plaintiff here, that court expressly applied
§ 6672 to excise tax payments that National deferred under
the Stabilization Act and held National’s Chief Executive
Officer personally liable under § 6672. Conway, 647 F.3d
228. Specifically, the Fifth Circuit held that nothing in the
Stabilization Act evinced a congressional intent to authorize
the airlines to use the trust funds as working capital or to
“render payment of the excise taxes beyond the ordinary
course of business.” Id. at 236. We see no reason to depart
from the approach of our sister circuit.

    Ordinarily, excise taxes collected by a carrier on behalf of
the government are held in trust, and the funds cannot be used
by the carrier for any other purpose. See Begier, 496 U.S. at
55–56 (“Because the amount of these taxes is ‘held to be a
special fund in trust for the United States,’ [26 U.S.C.]
§ 7501, they are often called ‘trust-fund taxes.’”). The carrier
incurs liability for the trust fund taxes because, once the
carrier collects them, the taxes are credited as paid by the
passenger. See Slodov, 436 U.S. at 242–45 (describing third-
party collector liability in the context of employment taxes
held in trust). Without recourse to the third-party collector,
the government would have no means to collect the taxes due.
Id. at 243. The carrier is then obligated to pay over those
taxes to the government on regular intervals or risk, among
                 NAKANO V. UNITED STATES                        11

other forms of liability, personal liability for its officers under
§ 6672. 26 U.S.C. §§ 4261(d), 4263(d), 4291.

    Out of concern for the airline industry following the
tragedy on September 11, 2001, Congress passed the
Stabilization Act, which extended the due date for excise tax
deposits as follows:

            SEC. 301. EXTENSION OF DUE DATE
        F O R E X C IS E T A X D E P O S IT S ;
        TREATMENT OF LOSS COMPENSATION

          (a) EXTENSION OF DUE DATE FOR
        EXCISE TAX DEPOSITS.—

            (1) IN GENERAL.—In the case of an
        eligible air carrier, any airline-related deposit
        required under section 6302 of the Internal
        Revenue Code of 1986 to be made after
        September 10, 2001, and before November
        15, 2001, shall be treated for purposes of such
        Code as timely made if such deposit is made
        on or before November 15, 2001. If the
        Secretary of the Treasury so prescribes, the
        preceding sentence shall be applied by
        substituting for “November 15, 2001” each
        place where it appears—

                (A) “January 15, 2002”; or

               (B) such earlier date after November
        15, 2001, as such Secretary may prescribe.
12              NAKANO V. UNITED STATES

Stabilization Act § 301(a)(1). With that text, Congress
passed, and the President signed into law, a mandatory
deferral of carriers’ quarterly excise tax due date from on or
after September 11, 2001, until November 15, 2001, or until
January 15, 2002, at the discretion of the Secretary of the
Treasury. Id. Plaintiff contends that this Act rendered the
deferred payments not trust funds under 26 U.S.C. § 7501
and, therefore, not subject to § 6672 liability.

    “The starting point in discerning congressional intent is
the existing statutory text . . . . It is well established that
when the statute’s language is plain, the sole function of the
courts—at least where the disposition required by the text is
not absurd—is to enforce it according to its terms.” Lamie v.
U.S. Tr., 540 U.S. 526, 534 (2004) (citation and internal
quotation marks omitted). “The plain meaning of a statute is
always controlling unless that meaning would lead to absurd
results.” SEC v. McCarthy, 322 F.3d 650, 655 (9th Cir. 2003)
(internal quotation marks omitted). It is only when statutory
terms are ambiguous, that is, open to more than one plausible
interpretation, Chickasaw Nation v. United States, 534 U.S.
84, 90 (2001), that courts may look to legislative history,
McCarthy, 322 F.3d at 655.

    The text of the law provides no support for the theory that
Congress intended the Stabilization Act to strip trust status
from collected excise taxes. As the unambiguous statute
makes clear, it was enacted simply to authorize a short
mandatory deferral, plus the possibility of a four-month
discretionary deferral upon approval by the Secretary of the
Treasury. Nothing in the text of the statute addresses the
possibility that the trust funds could be used for other
purposes or that Congress intended to repeal 26 U.S.C.
                    NAKANO V. UNITED STATES                          13

§ 7501.2 See Branch v. Smith, 538 U.S. 254, 273 (2003) (“An
implied repeal will only be found where provisions in two
statutes are in ‘irreconcilable conflict,’ or where the latter Act
covers the whole subject of the earlier one and ‘is clearly
intended as a substitute.’”). An amendment to § 6672 to
suspend personal liability for the deferred payments cannot be
made by implication. Reg’l Rail Reorg. Act Cases, 419 U.S.
102, 133–34 (1974). Moreover, there is no conflict, let alone
an irreconcilable conflict, between a provision deferring for
two to four months a particular payment and the trust status
of the deferred funds.

    Indeed, Plaintiff makes no textual argument to support his
theory that the Stabilization Act amended implicitly
Plaintiff’s trust obligations for § 6672 purposes. Nor does he
suggest that the text is ambiguous. Rather, citing United
States v. Champlin Refining Co., 341 U.S. 290, 298 (1951),
he contends that the only reasonable purpose for the
Stabilization Act deferral was to make those funds available
for operating expenses and that to hold otherwise would
render the Act wholly without purpose, in contravention of
basic principles of statutory interpretation. Plaintiff relies on

 2
     Title 26 U.S.C. § 7501(a) provides:

               Whenever any person is required to collect or
          withhold any internal revenue tax from any other
          person and to pay over such tax to the United States,
          the amount of tax so collected or withheld shall be held
          to be a special fund in trust for the United States. The
          amount of such fund shall be assessed, collected, and
          paid in the same manner and subject to the same
          provisions and limitations (including penalties) as are
          applicable with respect to the taxes from which such
          fund arose.
14              NAKANO V. UNITED STATES

two sources to support his assertion. Neither helps him, even
assuming that we may look past the text to legislative history.

     First, Plaintiff cites a few minor comments from the
House floor debates to the effect that the Act was intended to
keep airlines in operation. Those comments, though,
addressed the Act generally and did not reference even
indirectly the excise tax deferral provision.

    Second, Plaintiff cites a news article from the
Philadelphia Inquirer in which carriers suggested that a
deferral of the due date for excise taxes would mean that the
funds could be used for daily operating expenses. But that
article sheds no light on congressional purpose. Not only did
the article contain only the carriers’ view, but it post-dated
the enactment of the statute in question.

    Nor is Plaintiff correct as a matter of common sense,
which he urges us to employ. There are other reasons,
besides freeing funds for daily operating expenses, why
Congress could have enacted the deferral. For example, as
the district court noted, Congress could simply have intended
to allow carriers to enjoy the time value of money. That
concept encompasses not only the receipt of interest on the
deferred payments, but also the ability to hold the funds to
increase cash reserves. Larger cash reserves could make a
company appear less risky and therefore more attractive to
investors.

    In short, we agree with the Fifth Circuit that we need not
examine legislative history, because the statute is clear.
Conway, 647 F.3d at 236. But no matter how far we pursue
Plaintiff’s argument, we do not share his view that Congress
meant a very small benefit (a short delay in paying one or two
                 NAKANO V. UNITED STATES                      15

quarters of excise taxes) to signal a massive change in the
fundamentals of the long-standing statutory operation of
excise taxes. Congress’ only discernable purpose was simply
to provide a brief deferral for carriers’ excise tax payments.
Interpreting the deferral provision of the Stabilization Act to
serve only that small purpose satisfies any obligation we
might have under Champlin Refining Co., 341 U.S. at 298.

    Plaintiff’s final argument is that the Supreme Court’s
decision in Slodov, 436 U.S. 238, precludes application of
§ 6672 liability to the deferred tax payments because doing so
would frustrate congressional purpose. We disagree for two
reasons. First, the situation here is not like the one that the
Supreme Court considered. Second, the rule in Slodov rested
narrowly on statutory text.

    In Slodov, a new owner had taken control of a business
after the previous management had dissipated all liquid
assets, including the collected taxes that have trust status
under 26 U.S.C. § 7501. 436 U.S. at 240–41. The Supreme
Court held that § 7501 trust status did not “impress a trust on
after-acquired funds.” Id. at 259. Because the after-acquired
funds were not trust funds under § 7501, the new owner did
not incur § 6672 liability for failing to pay over the funds. Id.
at 259–60.

    By contrast, here, Plaintiff himself dissipated the collected
excise taxes held in trust under § 7501. Thus, Slodov does
not support a conclusion that the funds were no longer trust
funds at the time of dissipation. As we held in Davis, the
Slodov rule does not apply to existing management. Davis,
961 F.2d at 872–73.
16              NAKANO V. UNITED STATES

   In addition, contrary to Plaintiff’s contention, the Court’s
holding was grounded in the plain text of § 7501, Slodov,
436 U.S. at 255–56 (recognizing that the text of § 7501
applied to funds “collected” or “withheld” in the past tense
and did not address the status of later-acquired funds). The
Court did not establish a broader rule that § 6672 liability
cannot apply whenever it might appear to frustrate the
administration of a separate regulatory scheme.

     AFFIRMED.