Charles Richard Roth, Plaintiff-Counterclaim v. United States of America, Defendant-Counterclaim

779 F.2d 1567, 57 A.F.T.R.2d (RIA) 603, 1986 U.S. App. LEXIS 21334

• Court: Court of Appeals for the Eleventh Circuit
• Decided: January 16, 1986
• Docket: 85-7192
• Status: Published

Opinions

TUTTLE, Senior Circuit Judge:

This is an appeal by the United States from a denial by the trial court of a motion for j.n.o.v. after a jury had found that the appellee, Roth, was not a “responsible person” within the meaning of Section 6672 of the Internal Revenue Code of 1954 who would be required “to collect such tax, and truthfully account for and pay over such tax” to the United States government.

I. STATEMENT OF THE CASE

Taxpayer, Charles Richard Roth, filed this suit to recover $200.00 which he had paid on a penalty of $22,805.26 imposed against him pursuant to Section 6672 of the Internal Revenue Code of 1954,¹ for failure to collect and pay over federal employment taxes withheld from the wages of the employees of Leewood Development Corp. (later Leewood, Inc.) for the last two quarters of 1977. The United States filed a counterclaim against taxpayer for the unpaid balance of the assessment amounting to $22,-637.89 plus interest. The case was tried to a jury which returned a verdict that taxpayer was not a person responsible for the unpaid employment taxes with respect to the stated quarters. The government, having moved for directed verdict, thereafter moved for judgment notwithstanding the verdict which was denied in an opinion and order entered on January 9, 1985.

II. STATEMENT OF FACTS

With a single exception, the facts that went to the jury were undisputed. The one exception is the conflict in testimony between the plaintiff, Roth, and Dobbins, the chief executive officer and president and majority owner of the corporation. Roth testified that he was instructed by Dobbins in August of 1977 not to pay the withheld employees’ taxes, but to pay other creditors and the salaries of the employees. Dobbins denied that he gave such instructions and denied that he knew the taxes were unpaid. Thus, the only issue presented to the jury was that presented by a charge to the jury, duly objected to by the United States, as follows:

Even if you, the jury, find that plaintiff is otherwise a responsible person within the meaning of the statute, but also find that the plaintiff was prevented from paying the payroll taxes by specific instructions by the president of the company, then you must find that plaintiff did not willfully fail to pay the payroll taxes and plaintiff must be relieved of liability.

As we have stated above, the evidence which would establish the fact that the “plaintiff is otherwise a responsible person within the meaning of the statute” is undisputed. Essentially, it is as follows.

Roth was offered an opportunity to participate in a small corporation to be organized by Dobbins who was a real estate developer and who was a beneficiary of a trust which owned the majority stock in a number of other real estate corporations. After incorporation of Leewood Development Corporation (“LDC”), whose name was later changed to Leewood, Inc., Roth was named executive vice president and Dobbins became president and chairman of the board. Roth was not a director. LDC was engaged in contracting with builders for performing part of construction projects, such as putting sheet rock in buildings under construction. Initially, LDC and Roth and his secretary and bookkeeper had offices in the same complex as Dobbins and his other companies. Within a year, however, Leewood moved away into a warehouse which was used for the storing of material used in its construction work. At all times, Roth hired office employees and signed checks for the payrolls, including his salary of $700.00 a week. He paid substantially all bills for supplies and signed the checks paying to the United States the amount deducted from the employees as payroll deductions, so long as these were paid. Roth had signature authority on all of the company’s checking accounts and he drew most of the checks, including those for his weekly salary until he resigned towards the end of the second quarter of 1977. He signed as the officer of the company a mortgage for $115,000.00 secured by property belonging to Dobbins and which was also endorsed by Dobbins. Roth was given an option to buy up to 50 percent of LDC’s corporation stock which he never exercised. Taxpayer made the contracts which the company performed and, according to his testimony, he handled “the day to day operations of Leewood Development Corporation.” From the middle of August, 1977, taxpayer was aware of the fact that the payroll taxes were not being remitted to the United States although he had at all times known of the obligation of the company to transfer them. During the period involved, the company had more than sufficient funds to have paid all of the withheld taxes.

According to the verdict of the jury, it must have believed Roth’s testimony that he told Dobbins in August, 1977, that the company did not have the funds necessary to pay the payroll taxes.

The jury must also have accepted the following testimony by Roth:

BY MR. SMITH:

Q. Let me ask it this way, then, Rick. Were you aware that the payroll taxes had not been paid?

A. Yes, sir.

Q. When were you made aware of that? A. Approximately the middle of August of ’77.

Q. Okay. Who made it aware to you? A. Kathy Hosmar [the company’s bookkeeper],

Q. Okay. What did you do when you were aware that Leighwood didn’t have sufficient funds to pay the payroll taxes?

A. I contacted Mr. Dobbins to see what would be done at that point.

Q. Did you have a conversation?

A. Yes, sir.

Q. What was that conversation?

A. The conversation was that what was we going to do in getting the money to the company to pay the taxes and when would it be in there and how was we going to pay it.

Q. And what did he tell you?

A. He came over to the office—

MS. PRIVETT: I’m going to object, Your Honor, again, on the same purposes.

THE COURT: Overruled. This goes to the authority and it goes to the issue of wilfulness.

BY MR. SMITH:

Q. Okay. What did Mr. Dobbins tell you, Rick?

A. He came to the office and he looked at the amount of taxes that was owed and we had a discussion on where we could come up with the money.

And his conversation with me was that he had some apartments that would be sold and, upon the sale of those apartments, he would put the necessary funds in the company to pay the taxes.

Q. Did he give you any instructions— A. At that time—

Q. About who to pay and who not to pay?

A. At that time, he was thinking that the apartments would close very soon. So his instructions to me was to be sure to make the payroll and pay the creditors so we could stay in business, that these apartments could close and he could pay the taxes and not to pay the taxes, and it would put the company in bankruptcy. Q. What did you do?

A. I done what Mr. Dobbins told me to do. I made the payroll and paid the creditors that was necessary to keep getting the material, waiting for the apartments to close so that we might be able to pay the taxes.

Q. And this was in August of ’77, you say?

A. Yes, sir.

Q. Did you talk to him at any time subsequent to August of ’77 about payroll taxes?

A. Not to my knowledge, because it was August before I was aware that the taxes was—

Q. After August, did you talk to him about these payroll taxes?

A. Almost weekly.

Q. What was his response?

A. Well, the response that I got was that whatever the problem was, it was a problem with closing on the apartments due to some zoning laws in Vestavia, and it was going to take longer than he first anticipated to close the apartments and come up with case.

Q. What instructions, if any, did he give you?

A. To continue to keep the company going until he could close those apartments and pay those taxes.

R., Yol. II, p. 79.

Thus, it is plain that we have a case in which it is clear that Roth was a responsible person within the contemplation of the Act, unless he was removed from that status by the instructions given him by Dobbins. Although Dobbins testified that he did not give Roth any such instructions, because he did not even know that the payments on the 941 forms were past due until the end of November, 1977, we must treat the case as if the jury believed Roth’s testimony with respect to this rather than that of Dobbins.

III. DISCUSSION

The.sole issue before the Court is whether it is true that an otherwise responsible person under the Act sheds that status if, after the taxes are withheld, and while they are being continually withheld, such responsible person is directed by an officer with authority to control his actions as to corporate affairs not to pay the government’s trust funds to the Internal Revenue Service. Initially, we must consider the nature of the funds we are talking about. They are amounts which LDC deducted from the payroll checks given to its employees for the payment of the employee’s income tax and Social Security taxes, together with the amount that LDS itself owed as Social Security taxes for the employees. Next, we must realize that the statute that requires these funds to be withheld by an employer makes these trust funds of the United States. Also, such withholding is treated by the IRS as payment by the employees of their taxes.

Section 7501 of the Internal Revenue Code provides:

A. Liability for taxes withheld or collected.

(a) General rule. — 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.

We must bear in mind that, even after he was instructed by Dobbins not to pay the government its withheld funds, taxpayer as manager of the day to day affairs of the company, caused deductions to continue to be made from the weekly pay checks given to the company’s employees, fully knowing that he would not transmit such funds to the government. We must also remember that it was not until the middle of August, or the middle of the third quarter of 1977, that Roth was instructed by Dobbins not to pay the withheld funds to the IRS. Since Roth knew that payments were required at least biweekly, according to his testimony, he was certainly the responsible officer up until the time he was told by Dobbins to stop making such payments, even on the assumption that he lost such status after having been so instructed.

There is no dispute between the parties about the fact that more than one person may be a “responsible person” for an employer. Mazo v. United States, 591 F.2d 1151 (5th Cir.1979)²; Moore v. United States, 465 F.2d 514 (5th Cir.1972).

The Court of Appeals for the Fifth Circuit has held that “responsibility” in this context is “status, duty, and authority not knowledge.” Mazo, supra, at 1156. Most of the cases cited by appellee deal with decisions as to what constitutes a “responsible person” without any reference to directions given by a superior officer. Neckles v. United States, 579 F.2d 938 (5th Cir.1978); Brown v. United States, 464 F.2d 590 (5th Cir.1972); Liddon v. United States, 448 F.2d 509 (5th Cir.1971). However, the government cites one case which deals with the same problem that is presented here. In Howard v. United States, 711 F.2d 729 (5th Cir.1983) (a case which is not a binding precedent for us), the Court held that a person who was otherwise a “responsible person” within the contemplation of the statute remained liable for failure to pay over the withheld funds to the United States in spite of the fact that he had been instructed by the CEO of the corporation not to pay the IRS anything. The Court stated:

The fact that Jennings (the CEO) might well have fired Howard had he disobeyed Jennings’ instructions and paid the taxes does not make Howard any less responsible for their payment. See Brown, 464 F.2d [590] at 591, n. 1 (5th Cir.1972) (“responsible person” need not have final word on payment of bills and taxes). Howard had the status, duty and authority to pay the taxes owed, and would only have lost that authority after he had paid them. Authority to pay in this context means effective power to pay. That Howard had this authority is demonstrated by the fact that he did issue small checks without Jennings’ approval on a number of occasions. Commonwealth National Bank [v. US.], 665 F.2d [743] at 752 [(5th Cir.1982)]. Had Jennings fired Howard for paying the taxes, Howard would at least have fulfilled his legal obligations. Faced with the possibility of leaving the frying pan with only minor burns, Howard chose instead to stay on in the vain hope of avoiding the fire. While we appreciate the difficulty of his position, we cannot condone his abdication of the responsibility imposed upon him by law. See Moore, 465 F.2d at 517 (corporate officers who merely followed their superiors’ instructions in issuing checks to creditors were nevertheless “responsible persons”).

Id. at 734-35 (footnote omitted.)

The trial court in the instant case noted the Howard decision but expressly declined to follow it, stating that to follow the precept of Howard would be to condone the corporation’s vice president’s using corporation money contrary to the instructions of the president and that this would be equated with embezzlement.

We perceive a reason, beyond that stated in Howard for rejecting Roth’s argument here. That is, that the funds which accumulated in the bank account of LDC by reason of withholding the Social Security taxes and income taxes owed by the employees to the federal government became trust funds of the United States. With respect to those funds, the federal statute created a distinct and definite obligation on every responsible officer. That obligation was to remit such funds to the Internal Revenue Service. In our view, no instruction by the president or the majority owner of LDC could effectively bar an otherwise responsible officer from paying these funds in accordance with the law. Although in the company’s bank accounts, the company was in effect an interloper with respect to that part of the bank account that represented the trust funds accumulated because of the payment by the employees of their federal taxes. Roth once having become an “otherwise responsible person” to pay over the taxes became obligated by statute to pay these funds to the Internal Revenue Service. He was under no obligations to obey instructions from his corporate supervisor not to do so. Moreover, it should be borne in mind as noted above, that during the second half of 1977, Roth received over $8,000 by cheeks signed by him knowing that the corporation was obligated to use these funds to pay the debt to the government.

We conclude that the result in Howard was correct for the reasons stated there and in light of the additional considerations which we have stated here.

The judgment is REVERSED and the case is REMANDED to the district court with directions that it enter a judgment for the defendant and cross-appellant j.n.o.v.

1 . Section 6672(a) provides:

SEC. 6672. FAILURE TO COLLECT AND PAY OVER TAX, OR ATTEMPT TO EVADE OR DEFEAT TAX.

(a) [as amended by Sec. 9(a), Act of November 10, 1978, Pub.L. No. 95-628, 92 Stat. 3627] General Rule. 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. No penalty shall be imposed under section 6653 for any offense to which this section is applicable.

2 . In Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir.1981) (en banc), the court adopted as binding precedent all of the decisions of the former Fifth Circuit handed down prior to the close of business on September 30, 1981. Id. at 1209.