Bell v. United States ( 2004 )

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206 2 Bell v. United States No. 02-3295
ELECTRONIC CITATION: 2004 FED App. 0006P (6th Cir.)File Name: 04a0006p.06 OF JUSTICE, Washington, D.C., Annette G. Butler,
ASSISTANT UNITED STATES ATTORNEY, Cleveland,
Ohio, for Appellee.
UNITED STATES COURT OF APPEALS
_________________
FOR THE SIXTH CIRCUIT
_________________ OPINION
_________________
ROXANNE BELL, X
- KAREN NELSON MOORE, Circuit Judge. Many
Plaintiff-Appellant, employers are required to withhold various taxes from the
-
- No. 02-3295 wages of their employees, which the employers hold in trust
v. - until the taxes are paid over to the federal government.
> Failure to forward these “trust fund” taxes to the government
, violates § 6672(a) of the Internal Revenue Code (“Code”), 26
UNITED STATES OF AMERICA , -
Respondent-Appellee. - U.S.C. § 6672(a). This case involves a determination of what
constitutes a willful failure to pay those taxes. Plaintiff-
N Appellant Roxanne Bell brought an action against the Internal
Appeal from the United States District Court Revenue Service (“IRS”) claiming a refund for $58,902.24
for the Northern District of Ohio at Akron. that was paid to satisfy an assessment made against the late
No. 99-02102—Patricia A. Hemann, Magistrate Judge. Willard R. Bell (“Bell”). She claimed that Bell did not
willfully fail to pay trust fund taxes, because his company’s
Argued: July 31, 2003 relationship with its lending institution deprived him of
control over his company’s funds such that he could not pay
Decided and Filed: January 7, 2004 the taxes. The district court granted the government’s motion
for summary judgment. We AFFIRM because Bell’s
Before: DAUGHTREY, MOORE, and SUTTON, Circuit voluntary commencement of a contractual relationship with
Judges. a bank that limited but did not deprive him of his ability to
pay the trust fund taxes and Bell’s repeated payments to
_________________ creditors other than the federal government constituted a
willful failure under § 6672(a).
COUNSEL
I. BACKGROUND
ARGUED: David G. Umbaugh, UMBAUGH & SHARP,
Hudson, Ohio, for Appellant. Karen D. Utiger, UNITED Bell’s difficulties with the IRS trace back to July 1990,
STATES DEPARTMENT OF JUSTICE, Washington, D.C., when Bell purchased Dyac Corporation, a floundering
for Appellee. ON BRIEF: David G. Umbaugh, UMBAUGH company that manufactured industrial fasteners and shell
& SHARP, Hudson, Ohio, for Appellant. Karen D. Utiger, casings for munitions. It is not disputed that Bell was the
Teresa E. McLaughlin, UNITED STATES DEPARTMENT largest stockholder (51.5% of shares) and chief operating
1
No. 02-3295 Bell v. United States 3 4 Bell v. United States No. 02-3295
officer of Dyac, nor is it disclaimed that Bell essentially ran “stepped over the line . . . exercising complete control over
the company on a day-to-day basis. Like any other business, which obligations would be paid.” Joint Appendix (“J.A.”)
Dyac was responsible for withholding federal wage, Federal at 307 (Bell Statement, Apr. 3, 1996). Bank One, however,
Insurance Contribution Act (“FICA”), and Medicare taxes disclaims this recounting of its relationship with Dyac.
from employees’ wages and keeping them in “trust” until it
remitted them to the federal government on a quarterly basis. Dyac’s financial woes did not cease, and by January 1992,
Dyac sufficiently met its trust fund tax obligations through Dyac had overextended its credit with Bank One. On
the fourth quarter of 1991. January 22, 1992, Dyac and Bank One entered into a
Forbearance Agreement, which permitted Dyac to keep its
Dyac was struggling financially at and following its doors open. The Forbearance Agreement perpetuated the
acquisition by Bell. Bank One, which had served as a lender lock-box arrangement, reduced the loan-advance ceiling, and
to Bell during the acquisition process, provided Dyac with a explicitly addressed the payment of trust fund payroll taxes:
revolving line of credit secured by security interests in Dyac’s
assets. As a consequence of financial problems throughout The Borrower agrees that the first Revolving Loans
1991, Bank One and Dyac amended their loan agreement available to it hereunder as of the date . . . hereof . . . and
several times. On September 30, 1991, Bank One and Dyac thereafter as may be necessary . . . shall be set aside and
signed the “Fourth Amendment to the Credit and Security reserved for the payment of that week’s projected payroll
Agreement,” which provided for the commencement of a and “trust fund” payroll taxes, as the same are set forth
lock-box arrangement. Bell and Dyac would place all cash on the Budget; and the Borrower hereby instructs the
receipts into the lock-box, which reduced Dyac’s mounting Bank without further instruction or request from the
indebtedness to Bank One. Then, Bank One would release Borrower, to advance such Revolving Loans as deposits
additional loan advances into one or more of Dyac’s three into the Borrower’s payroll account maintained at the
accounts with the Bank (a general operating account, a Bank and hereby further agrees that such sums shall be
payroll account, and a trust fund account). In order to obtain drawn upon solely for such purposes.
these advances, Dyac had to submit a “borrowing certificate”
to Bank One on a weekly and sometimes daily basis. J.A. at 99 (Forbearance Agreement). At some point after
December 1991, Bank One stopped approving loan advances
The issue of who controlled Dyac’s funds is paramount. to cover the payroll trust fund taxes. The timing of Bank
Bank One did not actually pay any of Dyac’s bills under this One’s cessation of trust fund loan advances is in dispute. In
arrangement; the Bank released the funds to Dyac’s accounts, a letter/memorandum dated April 3, 1996, Bell claimed that
and Bell, as the chief operating officer, disbursed the money in “mid December [1991]” Bank One “began excluding
without further bank supervision. The Bank did control how Payroll Trust Items” from the items approved on the
much money flowed into Dyac’s bank accounts, but the Bank borrowing certificates. J.A. at 306-07 (Bell Mem.).
did not actually control the company’s financial outlays. Bell However, a Bank One loan officer noted in a memo
alleged in a deposition that Bank One had considerable requesting approval for the Forbearance Agreement on
authority over Dyac’s accounts. He contended that Bank One January 22, 1992, that the Bank would advance $16,500 as
often would refuse to advance funds until Dyac submitted a part of the agreement, partially to be used for trust fund taxes.
list of payees and Bank One would then edit the list so as to
disallow certain payments. Bell also claimed that Bank One
No. 02-3295 Bell v. United States 5 6 Bell v. United States No. 02-3295
On February 12, 1992, Bank One denied Dyac’s request for Following Bell’s death, Roxanne Bell brought this refund
additional loan advances to pay off Dyac’s past trust fund tax action on September 3, 1999,2 as an individual, as executrix
obligations. Bell sent Bank One a fax that requested an of Bell’s Estate, and as Trustee of the Willard R. Bell Living
advance for “past trust fund obligations which the Company Trust. Upon consent of the parties, the case was transferred
has not been able to obtain the release of our funds from the to a U.S. Magistrate Judge for disposition. 28 U.S.C.
Bank to be able to discharge.” J.A. at 280 (Facsimile Dated § 636(c)(1). The Government filed a motion for summary
02/12/92). The fax specifically mentioned over $51,000 in judgment, and in response Roxanne Bell conceded that Bell
FICA trust fund taxes that were in arrears for most of January. was responsible for paying the trust fund taxes but denied that
Gary Sprague (“Sprague”), the Bank One loan officer in he willfully failed to pay the taxes. The magistrate judge
charge of the Dyac accounts, denied the request because Bank granted the Government’s summary judgment motion,
One had already lent Dyac money for payroll taxes in January concluding that because Bell used Bank One’s loan advances
and this additional request represented an overadvance that to pay creditors other than the IRS and because Bell knew that
was not covered by the Forbearance Agreement. the trust fund taxes were not being paid, as evinced by his
complaints that he needed to receive additional loans to pay
During January, February, and the first week of March in the taxes, he was responsible and willfully had failed to pay
1992, Dyac failed to pay to the IRS any trust fund taxes. the taxes. The court also rejected Roxanne Bell’s argument
Dyac had thus failed to pay six weeks of trust fund taxes in that there was “reasonable cause” for Bell’s failure to pay the
1992 before the February 12 refusal by Bank One to advance taxes, such that he should be excused from his liability. The
any funds for the past tax debt. Dyac then failed to pay any district court had proper jurisdiction over Roxanne Bell’s
taxes for the rest of February and March. Yet, Dyac still
continued to disburse funds, as it withdrew over $1.37 million
from its three bank accounts during that time. Additionally,
Dyac continued to pay money to other creditors during the
first quarter of 1992, as Thomas Small, the Vice-President of
Dyac, stated that Dyac satisfied its obligations to vendors, overpayment on April 15, 1997; (2) Bell made a $1,000.00 payment on
such as the phone company, the electric company, and several May 7, 1997; (3) Bell applied a credit of $1,417.00 from a previous
overpayment on April 15, 1998; (4) Bell’s estate made a payment of
steel suppliers while the delinquent taxes accrued. $346.00 on June 10, 1998; and (5) Bell’s estate made a payment of
$55,806.25 on November 7, 1998. Bell overpaid by $43 .35, which the
Dyac filed for bankruptcy on March 6, 1992. On March 17, IRS refunded in December 199 8. On A pril 29 , 199 7, Bell filed a timely
1997, the IRS made an assessment of $58,902.24 against Bell refund claim for the $8 ,203 .00. H e subsequently amended the refund
under § 6672 of the Code for the full amount of the unpaid claim to contest also the $1,000 payment made on May 7, 1997. The IRS
denied the consolidated claim on Sep tember 4, 1997 . Roxanne Bell did
trust fund tax debt from the first quarter of 1992. See 26 not file a refund claim for the mo ney pa id in Ap ril, June, and November
U.S.C. § 6672. Bell paid the assessment and requested a 1998 until after she filed the action in this court. On May 1, 2000,
refund, which the IRS ultimately denied in September 1997.1 Roxanne Bell filed a claim for the entire $58,902.24. Her claim regarding
the $1,417.00 credit applied to the debt on April 15, 1 998 was untimely
because it was filed more than two yea rs after the tax was paid. See 26
U.S.C. § 6511(a). The IRS denied the claim on November 16, 2000.
1
The total amount o wed by Bell equaled $ 66,7 29.0 5, including 2
interest and fees. Bell and his estate resolved the debt through a series of The action was timely because it was filed within two years of the
paymen ts: (1) Bell applied a credit of $8,203.00 from a previous denial of the claim for refund. See 26 U.S.C. § 65 32(a)(1).
No. 02-3295 Bell v. United States 7 8 Bell v. United States No. 02-3295
initial claim pursuant to 26 U.S.C. § 1346(a)(1),3 and this drawn from such facts in the light most favorable to the
court has jurisdiction over her timely appeal pursuant to 28 nonmoving party. 60 Ivy St. Corp. v. Alexander, 822 F.2d
U.S.C. §§ 636(c)(3), 1291. 1432, 1435 (6th Cir. 1987). The moving party has the burden
of establishing that no genuine issue of material fact exists,
II. ANALYSIS but the nonmoving party also has a responsibility “to make a
showing sufficient to establish the existence of an element
A. Standard of Review essential to that party’s case, and on which that party will bear
the burden of proof at trial.” Celotex Corp. v. Catrett, 477
We review de novo the district court’s decision to grant U.S. 317, 322 (1986). Ultimately, the court must determine
summary judgment. Allen, Inc. v. CSX Transp., 325 F.3d whether the evidence is such that a reasonable jury could
768, 771 (6th Cir. 2003). Summary judgment is appropriate return a verdict for the nonmoving party. Anderson v. Liberty
where “there is no genuine issue as to any material fact and Lobby, Inc., 477 U.S. 242, 252 (1986).
. . . the moving party is entitled to a judgment as a matter of
law.” Fed R. Civ. P. 56(c). The reviewing court must assess B. The Trust Fund Tax Liability Scheme
the available proof to determine whether there is a genuine
factual issue that justifies a trial. See Matsushita Elec. Indus. The Code requires most employers to withhold Social
Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). In Security, Medicare, and federal income taxes from their
doing so, the court must view the facts and all the inferences employees’ wages. See 26 U.S.C. §§ 3102, 3402. Section
7501 provides that the withheld money is held in trust for the
United States until paid to the Treasury on a quarterly basis.
3
The Governme nt renews its contention that the district court did not 26 U.S.C. § 7501(a); Slodov v. United States, 436 U.S. 238,
have jurisdiction ov er Ro xanne Bell’s claim regarding the rejection of the 243 (1978). The withholding taxes “are part of the wages of
second refund claim filed in May 2000. In her co mplaint, Roxanne Bell the employee, held by the employer in trust for the
sought to reco ver the full amount, $5 8,90 2.24. The comp laint, though,
only mentio ned the Ap ril 199 7 refund claim that the IRS denied in
government”; the employer, as a function of administrative
September 1997. The government correctly stated in its answer that the convenience, extracts money from a worker’s paycheck and
district court at that point could not hear the claim b ecause Ro xanne Bell briefly holds that money before forwarding it to the IRS.
did not co mply with 26 U.S.C. § 7 422 (a), which states that “[n]o suit . . . Gephart v. United States, 818 F.2d 469, 472 (6th Cir. 1987).
shall be maintained in any court for the recovery of any internal revenue A delinquency in trust fund taxes thus is not simply a matter
tax alleged to have been erron eously or illegally assessed or co llected . . .
until a claim for refund or credit has been duly filed with the [IRS].” 26
between the IRS and an employer, but rather involves
U.S.C. § 7422(a). The government failed to file a motion to dismiss on employee wages. The significant responsibility of Dyac or
these grounds. The government next filed a motion for summary any other employer is summed up by then-Judge Cardozo’s
judgment in November 2 001, arguing again that the second refund claim famous statement that “[a] trustee is held to something stricter
was not properly before the district court. However, by this point, more than the morals of the market place. Not honesty alone, but
than a year had passed since the IRS had rejected R oxanne B ell’s second
refund claim, and the district co urt thus co uld properly consider the claim.
the punctilio of an honor the most sensitive, is then the
The government asserts now that Roxanne B ell’s com plaint is faulty. standard of behavior.” Meinhard v. Salmon, 164 N.E. 545,
This argument fails, however, because while Roxanne Bell’s complaint 546 (N.Y. 1928).
may have been premature earlier in the litigation due to her failure to file
a refund claim with the IRS, she did eventually exhaust her administrative Thus, it should come as no surprise that Congress created
reme dy, and Roxanne Bell’s com plaint sufficiently states a claim for the a rigorous penalty for those who fail to remit the withheld
full $58,902 .24 over which the district court has jurisdiction.
No. 02-3295 Bell v. United States 9 10 Bell v. United States No. 02-3295
trust fund taxes to the government. Section 6672(a) provides he has placed at issue an assessment which is presumed
that “any person” who is required to collect the taxes and correct.” Collins v. United States, 848 F.2d 740, 742 (6th Cir.
willfully fails to pay them over to the government is 1988). This burden entails “proving, by a preponderance of
personally liable for 100% of the delinquent taxes. 26 U.S.C. the evidence, that he was not a responsible person who
§ 6672(a).4 The statute’s punitive nature comes not from an willfully failed to pay over the withheld taxes.” Id. Roxanne
increased monetary penalty, as the responsible party is not Bell thus has to demonstrate that a genuine issue of material
liable for an amount that is higher than the delinquent tax fact exists regarding her late husband’s responsibility for the
balance, but rather from personal, as opposed to corporate, taxes and his willful failure to pay them in order to show that
liability. Section 6672 thus exists “to protect the government the district court erred in its judgment.
against losses by providing it with another source from which
to collect the withheld taxes.” Gephart, 818 F.2d at 473; see C. Responsibility and Willfulness
also Bolding v. United States, 565 F.2d 663, 669 (Ct. Cl.
1977) (“Congress has allowed the IRS more stringent We first consider whether Bell was a responsible party.
protective devices to insure collection of payroll taxes than in The determination of responsibility focuses on the “degree of
the case of many other taxes.”). influence and control which the person exercised over the
financial affairs of the corporation and, specifically,
We, in step with other circuits, have held that an individual disbursements of funds and the priority of payments to
is liable under § 6672(a) if he or she: 1) is responsible for creditors.” Gephart, 818 F.2d at 473. Courts generally look
paying the taxes and 2) willfully fails to turn over the tax at factors such as the duties of the officer as described by the
money to the government. See Kinnie v. United States, 994 corporate by-laws and the ability of the individual to sign
F.2d 279, 283 (6th Cir. 1993); McDermitt v. United States, checks for the corporation. Id. Both parties here have
954 F.2d 1245, 1250 (6th Cir. 1992). To obtain a refund of conceded that Willard Bell was a responsible party, as he was
a previously paid assessment, a responsible person has the the chief shareholder and principal actor for Dyac, and there
burden of showing that the assessment is inaccurate, “because is accordingly no genuine issue of material fact on this point.
The question of whether Bell willfully neglected to pay
4
over the withheld trust fund monies is more complicated.
Section 6672 (a) reads: Under our basic definition of willfulness, “[a] responsible
Any person required to collect, truthfully account for, and pay person who makes a deliberate choice to voluntarily,
over any tax impose d by this title who willfully fails to co llect
such tax, or truthfully account for and pay over such tax, or consciously, and intentionally pay other creditors rather than
willfully attempts in any manner to evade or defeat any such tax make tax payments[] is liable for willful failure.” Collins,
or the payment thereof, shall, in addition to other penalties 848 F.2d at 742. The responsible party need not exhibit an
provided by law, be liable to a penalty equal to the total amount intent to defraud the IRS or some other evil motive; all that is
of the tax evaded, or not collected, or not accounted for and p aid necessary to demonstrate willfulness is the existence of an
over.
26 U.S.C. § 6 672 (a). See also Slodov v. United States, 436 U.S. 238, 245
intentional act to pay other creditors before the federal
(1978) (“[A]n employer-official or other employee responsible for government. See id.; Calderone v. United States, 799 F.2d
collecting and p aying taxes who willfully fails to do so is subject to . . . 254, 260 (6th Cir. 1986).
a civil penalty equivalent to 100% of the taxes not collected or paid
. . . .”). Criminal penalties are also available but are not at issue in this
case.
No. 02-3295 Bell v. United States 11 12 Bell v. United States No. 02-3295
We have held in the past that proof of a responsible 111 F.3d 1351, 1358 (7th Cir. 1997) (recognizing our use of
person’s knowledge of payments to other creditors and “unencumbered” in assessing willfulness). We stated that a
awareness of the failure to pay the trust fund taxes is enough responsible individual is willful if he “fails to use all
to trigger liability. In Collins, we held that even though the unencumbered funds that come into his possession thereafter
plaintiff was “a sympathetic figure,” who relied on another’s to pay the delinquent taxes.” Huizinga, 68 F.3d at 145
promise to pay off the taxes, he still acted willfully because (emphasis added). The encumbrance in Huizinga was a state
he knew that the taxes were not being paid and he diverted statute, the Michigan Building Contract Fund Act, which
funds, which could have been used to offset the tax debt, to statutorily obligated a contractor to hold in trust monies used
cover other business expenses. Collins, 848 F.2d at 742. In to fund construction projects in order “to protect the owner
Gephart, we held that a corporate general manager willfully and those whose labor and materials make the performance of
failed to pay the trust fund taxes, even though the manager a construction contract possible.” Id. (quotation omitted).
might have been fired for disobeying his superior’s orders not Here, Bell was contractually obligated to Bank One, and he
to pay the taxes, because the manager was aware of an unpaid had to submit borrowing certificates to garner loan advances,
tax debt yet continued to disburse funds to other creditors. but no statute or ordinance prevented Bell from paying the
Gephart, 818 F.2d at 475. trust fund taxes. Consequently, we are presented with a novel
question of whether a debtor’s voluntary entrance into a
Similarly, viewing the evidence in the light most favorable contractual agreement that restricts the debtor’s use of loan
to Bell, it is clear that Bell knew about the delinquent taxes advances in a lock-box arrangement encumbers those loan
and voluntarily paid other creditors before paying the federal proceeds such that the debtor cannot be said to have failed
government. The fax from February 12, 1992, in which Bell willfully to meet his or her trust fund obligations because he
requests a $51,000 loan advance to pay the IRS for past trust or she had limited control over the funds.
fund withholdings, demonstrates that he knew of the tax
delinquencies. But despite this clear awareness of the trust In holding that such a contractual obligation does not
fund tax debt, Bell continued to pay other creditors. Dyac’s constitute an encumbrance that relieves a responsible
bank records indicate that it withdrew $619,850 from its individual of liability under § 6672(a), we start with the
accounts in the month of February, J.A. at 158, 172, 177, and definition of “encumbered” presented in Huizinga. There, we
Bell’s attorney disclosed at oral argument that Dyac paid its drew our definition of “encumbered” from language in an
utility and supplier bills while the trust fund taxes went Eighth Circuit case when we wrote, “Funds are considered
unpaid. encumbered ‘only where the taxpayer is legally obligated to
use the funds for a purpose other than satisfying the
The crux of Bell’s argument on appeal is that Bell could not preexisting employment tax liability and [the] legal obligation
have willfully failed to pay the taxes, because the funds were is superior to the interest of the IRS in the funds.’” Huizinga,
“encumbered” by the Bank such that Bell would have paid the 68 F.3d at 145 (alteration in original) (quoting Honey v.
taxes but for the Bank’s refusal to permit him to apply the United States, 963 F.2d 1083, 1090 (8th Cir.), cert. denied,
loan advances toward the trust fund delinquency. In Huizinga 506 U.S. 1028 (1992)). The Honey opinion references a
v. United States, 68 F.3d 139 (6th Cir. 1995), we held that slightly different definition of encumbered offered by the
liability under § 6672(a) hinges upon whether funds that Bankruptcy Court for the Eastern District of Michigan in In
could be used to pay down the tax debt are “available” or re Premo, 116 B.R. 515 (Bankr. E.D. Mich. 1990). The
“unencumbered.” Id. at 145; see also United States v. Kim,
No. 02-3295 Bell v. United States 13 14 Bell v. United States No. 02-3295
Honey court first quoted the Premo decision, which set forth unlike the Honey test, counts as encumbrances those
the following definition: restrictions that are not legally enforceable, but “may be
practically irresistible because they arise out of the disparity
Where the taxpayer’s discretion in the use of funds is of bargaining power as between the taxpayer and its source of
subject to restrictions imposed by a creditor holding a financing.” See Purcell v. United States, 1 F.3d 932, 938-39
security interest in the funds which is superior to any (9th Cir. 1993).
interest claimed by the IRS, the funds are regarded as
encumbered if those restrictions preclude the taxpayer We decline to accept the Premo definition. In writing
from using the funds to pay the trust fund taxes. Huizinga, we quoted the Honey court directly and did not
mention the Premo case at all. It is incorrect to assume that
Premo, 116 B.R. at 535. Then, the Honey court distilled the by incorporating the narrower Honey formulation of
Premo definition into the language that we quoted in “encumbered” into our case law, we implicitly accepted the
Huizinga. Although the Honey court ostensibly adopted the broader Premo test when we did not even quote the Premo
Premo definition of “encumbered,”5 the Honey court’s language. Furthermore, the narrower definition of
distillation of the Premo test is distinct from the precise “encumbered” that we accepted in Huizinga best fits
language used in Premo.6 The Premo language is broader § 6672(a), which ensures the timely payment of trust fund
than the language we culled from the Honey opinion; the obligations to the government
Premo formulation includes funds that are “subject to
restrictions imposed by a creditor” to whom the debtor is This still leaves open the question of whether Dyac’s
contractually bound, whereas the Honey formulation that we contractual relationship with Bank One “legally obligated
adopted in Huizinga labels as “encumbered” only those funds [Dyac] to use the funds for a purpose other than satisfying the
limited by “legal obligations.”7 Additionally, the Premo test, preexisting employment tax liability . . . .” Huizinga, 68 F.3d
at 145. It is clear from Huizinga that a state statute mandating
the creation of a construction-contract trust constitutes an
5
The Eighth Circuit’s use of the Premo test is strange, beca use in
encumbrance, but it is not clear whether a contract, while a
doing so the court seemingly employed a more encompassing definition legal instrument, is a legal obligation within this context. In
of “encumbered” that would allow a greater number of responsible Kalb v. United States, 505 F.2d 506, 510 (2d Cir. 1974), cert.
persons to avo id liability under § 667 2(a), desp ite the Eighth Circuit’s denied, 421 U.S. 979 (1975), the responsible persons seeking
initial statement that its definition of “unencumbered” “should be a broad a refund voluntarily entered into a contract with their bank
one in order to ensure that the taxes are paid.” Honey v. United States, under which the responsible persons asked the bank to
963 F.2d 1083, 10 90 (8th Cir.).
forward funds to pay the trust fund debt, but at one point the
6
The Ninth Circuit in Purc ell v. United States, 1 F.3d 932 (9th Cir.
bank refused to approve the loan. The responsible persons
1993), labeled the Honey and Premo formulations as “competing had the power to disburse funds, and the court noted that they
standards.” Id. at 939. The court asserted that the Premo standard were free to rescind their contract with their bank at any
employed a “relatively relaxed definition of ‘encumbered funds,’” which
swept more broadly than the language we quoted from Honey. Id.7
Even the Premo court noted that “[t]he existence of a superior lien, funds unavailable for payment to the IRS of the trust fund taxes for the
without more, does not create an encumbrance for purposes of § 6672 [], time period in question.” In re Premo, 116 B .R. 515, 535 n.34 (B ankr.
[as] there must be conditions imposed by the lender which render the E.D. M ich. 1990).
No. 02-3295 Bell v. United States 15 16 Bell v. United States No. 02-3295
point. Id. The court stated, “[t]o permit corporate officers to unless he violated the terms of his contract with Bank One,
escape liability under section 6672 by entering into thereby opening himself up to a breach of contract suit. Such
agreements which prefer other creditors to the government a contention misunderstands the bedrock purposes of
would defeat the entire purpose of the statute.” Id. It § 6672(a); meeting federal trust fund taxation requirements
concluded, “We cannot imagine that in any other context a trumps whatever adverse consequences might result from
trustee could avoid his obligations by entering into an failing to navigate the web of various creditor-oriented
agreement by which funds entrusted to him are used to pay obligations in which a troubled company will find itself
his other obligations.” Id. entangled. For example, the Ninth Circuit considered a
similar factual situation, in which a lock-box arrangement
We agree with this reasoning. Corporate funds should not gave a debtor company only controlled access to loan
be considered encumbered simply because a contractual proceeds and only on a request-by-request basis. Purcell v.
obligation with a lender or other creditor impacts a company’s United States, 1 F.3d 932 (9th Cir. 1993). The court held that
ability to use its assets, receivables, or loan advances with even under the relaxed Premo standard, the funds were not
complete freedom. If this were the case, then nearly every encumbered because there were no “particular restrictions
responsible person involved with a failing company in the placed on the Company’s use of funds” once the new funds
midst of credit problems or intricate loan arrangements would were advanced. Id. at 939. In Bradshaw v. United States, 83
be able to avoid a finding of willfulness and thus evade F.3d 1175 (10th Cir. 1995), a creditor bank required a failing
liability. Such a result would undermine the purpose of company to get authorization before disbursing any company
§ 6672 in assuring that trust fund taxes are paid to the funds by check, and the creditor bank then refused to release
government. funds for payments of taxes. Id. at 1180 n.5. The court wrote
that rather than evade his responsibility to pay the taxes,
Thus, given the context of Huizinga in which we adopted “Bradshaw could have resigned his position with [the
our definition of “encumbered,” and in light of the risk of company] or refused to sign any checks and shut down the
eviscerating § 6672(a) by permitting voluntary encumbrances business.” Id. at 1181; see also Hochstein v. United States,
to interfere with the payment of trust fund taxes, we hold that 900 F.2d 543, 549 (2d Cir. 1990) (ruling that adverse
funds are encumbered only when certain legal obligations, consequences, such as losing one’s job, “simply are no excuse
such as statutes, regulations, and ordinances, impede the for failing to collect and pay” trust fund taxes).
freedom of a company to use its funds to fulfill its trust fund
tax debts. Voluntary contractual obligations, such as the Here, Bank One placed no restrictions on how Dyac could
lock-box arrangement at issue in this case, do not encumber spend its money once it received the loans, although it did
funds so as to prevent a willful failure to pay trust fund taxes. exercise control before the loan was made. Once Dyac
received the money from the bank, it could have used the loan
Roxanne Bell responds that the above view ignores the proceeds to pay off its trust fund debt. Counsel’s argument
reality that contractual obligations can often exert as much that Bank One choked up the supply of money so that it tied
force on a responsible person as a legal obligation. During Bell’s hands distorts the facts. Bank One refused only to
oral argument, Roxanne Bell’s attorney contended that, forward more money to cover accrued payroll trust taxes after
because Bank One only advanced Dyac loan proceeds to pay February 12th. By that point, Bell had already willfully failed
its utilities and suppliers and refused to forward money to to pay six weeks of payroll taxes in January and early
cover the delinquent tax debt, Bell could not pay the taxes February, and he had disbursed six weeks of loan advances to
No. 02-3295 Bell v. United States 17 18 Bell v. United States No. 02-3295
creditors other than the federal government. This point is his loan advances and Bank One would refuse to advance any
bolstered by the fact that Bell spent over $1.5 million from more loans, even to pay off the taxes. The limitations placed
Dyac’s three accounts in the first few months of 1992. While on Dyac’s funds were a result of Dyac’s and Bell’s willful
it is true that Bank One may have refused to earmark certain entry into various loan agreements and should not constitute
loan advances to pay past tax debts at some point in time, the encumbrances that abrogate a finding of willfulness.
withdrawals from the bank account demonstrate that there Furthermore, even if Bank One had complete dominion over
were at least some funds available to pay the trust fund taxes, Dyac’s finances such that it controlled all financial outlays
even if doing so somehow violated Dyac’s contract with Bank and disbursed funds to vendors and other creditors without
One. Dyac’s intervention, the funds could still not be considered
encumbered because Dyac had voluntarily entered into a
It is no excuse now to argue that encumbrances impeded contract giving up its control.8 To hold otherwise would be
Bell’s ability to remit the trust fund taxes, as Bell could have
shut down the company, suspended operations, filed for
bankruptcy, applied for a bridge loan from another lender, or 8
Roxanne Bell also urges us to conclud e that Bell had “reasonable
simply violated his contract with Bank One instead of failing cause” to be delinquent in pa ying his taxe s such tha t he should be excused
to fulfill his tax debt. None of these options is attractive or from liability. Contrary to the Government’s assertion, we have never
enviable, but in the eyes of § 6672(a), they are the correct decided whether there exists a reasonab le-cause exception to liability for
willful failure under § 66 72(a). In our only case o n point, Brewery, Inc.
choices. As we have stated, “It is no excuse that . . . the v. United States, 33 F.3d 589 (6th Cir. 1994), we simply made the
money was paid to suppliers and for wages in order to keep comm onsense comparison between the text of § 6672(a), which does not
the corporation operating as a going concern — the contain a reasonable-cause exception, and the statutory provision at issue
government cannot be made an unwilling partner in a in Brew ery, which d id contain an explicit reasonable-cause exception. Id.
floundering business.” Brewery, Inc. v. United States, 33 at 593.
W e do not reso lve this question here. W e note that at least one circuit
F.3d 589, 593 (6th Cir. 1994) (quotation omitted). has held that reasonable cause exists where “(1) the taxpayer has made
reasonable efforts to protect the trust funds, but (2) those efforts have
Additionally, a key distinction between contractual been frustrated by circumstances outside the taxpayer’s control.” Finley
obligations and the types of legal obligations that can v. United States, 123 F.3d 13 42, 1348 (10th Cir. 199 7); see also H owell
encumber funds is that in the former situation, a plaintiff v. United States, 164 F.3d 523 , 526 (10th Cir. 1998 ). The desire for an
voluntarily and willfully enters into the contractual exception stems fro m a fear that § 6 672 (a) has become a strict-liability
statute, pro mptin g concern fro m some courts. See generally, Phillips v.
arrangement that limits the funds. For example, in Bradshaw, IRS, 73 F .3d 9 39, 9 43 (9th Cir. 199 6); Williams v. United States, 931 F.2d
the court noted that although the plaintiff lacked the power to 805, 811 (11th Cir. 1991).
pay the trust fund taxes because the bank would not give its However, there are extre mely persuasive arguments against judicially
approval, “this lack of power was the direct result of the incorporating a reasonable-cause exception. First, C ongress exp licitly
Agreement which Bradshaw had negotiated and entered into inserted a reasonab le-cause exception into other penalty provisions of the
Code, but not § 6672(a). Compa re 26 U.S.C. §§ 6651(a)(3), 665 2(c)(3),
on behalf of [the company].” Bradshaw, 83 F.3d at 1181. 6656(a); 26 C.F.R. § 301.665 1-1(c). Second, in view of the unique trust
Here, Bell entered into the Fourth Amended Agreement, nature of the delinquent taxes at issue in § 6672, a rule rejecting a
which set up the lock-box system, and the Forbearance reaso nable-cause exception is desirable, even if it prod uces harsh results
Agreement, which perpetuated it. Bell voluntarily put himself in some ca ses, because the withheld payroll taxes are misdirected. Third,
and his company in a position in which it was not only the penalty for § 6672 is non-punitive, but rather simply attempts to
recoup the full amount of the delinquent taxes. Fourth, it is illogical for
plausible, but also quite foreseeable, that he would overextend a jury to find that an ind ividual is not liable unde r § 667 2 (a) bec ause
No. 02-3295 Bell v. United States 19
to allow employers an easy escape from federal taxation
responsibilities.
III. CONCLUSION
Taking all the facts and inferences from a viewpoint
favoring Bell, we conclude that there is no genuine issue of
material fact regarding the availability of the funds to pay the
taxes and Bell’s willful failure to pay the trust fund taxes.
Consequently, the judgment of the district court is
AFFIRMED.
elements existed beyond that perso n’s contro l directly following the jury’s
pred icate finding o f responsibility and willfulness that would make the
invocation of a reasonab le-cause exception necessary. Fifth, several other
circuits have rejected such a reasonable-cause exception. Olsen v. United
States, 952 F.2d 236 , 240 -41 (8 th Cir. 1991 ); Harrington v. United States,
504 F.2d 1306, 1316 (1st Cir. 197 4); Pac. Nat’l Ins. Co. v. United States,
422 F.2d 2 6, 33 & n.1 9 (9th Cir.), cert. de nied, 398 U .S. 937 (1970);
Monday v. Un ited States, 421 F.2d 121 0, 12 16 (7th Cir.), cert. denied,
400 U .S. 821 (1970 ).
W e need not take a side in this debate because even if a reasonable-
cause exception should exist in some con text, it certainly does not ap ply
here. Bell did not make reasonable efforts to use Bank One’s loan
advances in the early part of January and February to decrease his tax
delinq uency. Mo reover, B ell was not stymied by circumstances outside
his contro l, because Bell had free reign over the loan proceeds once B ank
One advanced them and he also had command over Dyac’s contract with
Bank One. A reasonable-cause exception may exist, but no taxpayer,
including Bell, has “yet carried that p ail up the hill.” Bowen v. United
States, 836 F.2d 96 5, 968 (5th Cir. 1988).