Case: 10-40485 Document: 00511543995 Page: 1 Date Filed: 07/19/2011
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
July 19, 2011
No. 10-40485 Lyle W. Cayce
Clerk
MICHAEL J. CONWAY,
Plaintiff – Appellant
v.
UNITED STATES OF AMERICA,
Defendant – Appellee
Appeal from the United States District Court
for the Eastern District of Texas
Before JOLLY, HAYNES, and GRAVES, Circuit Judges.
HAYNES, Circuit Judge:
Michael Conway (“Conway”) appeals from the district court’s summary
judgment determination that, pursuant to 26 U.S.C. § 6672, he is personally
liable for excise taxes that National Airlines (“National”) collected from its
passengers but failed to pay over to the United States during his tenure as
National’s CEO. Because we hold that the district court properly found that
Conway was a “responsible person”1 and that his failure to pay taxes was willful,
1
The courts have adopted the phrase “responsible person” to signify a person whose
position in a company makes him responsible for the collection, accounting, or payment of
trust-fund taxes. See 26 U.S.C. § 6672; Slodov v. United States, 436 U.S. 238, 245-46 & n.7
(1978).
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as defined by this circuit’s precedents, we AFFIRM the judgment of the district
court.
I. Background
Conway founded National in April 1995. From National’s inception until
its Chapter 7 bankruptcy in May 2003, Conway served as National’s CEO,
president, and chairman of the board. As an airline, National was required to
collect a transportation excise tax from its passengers and pay over the collected
taxes to the Government at regular intervals. See 26 U.S.C. § 4261. These taxes
were assessed against and paid by National’s passengers; National held these
taxes in trust for the Government. See Begier v. IRS, 496 U.S. 53, 55 (1990).
National struggled as a business and never reported a profit for an entire
year. In the third quarter of 2000, Conway and the other directors of National
began to discuss the possibility of declaring bankruptcy. On Thursday,
November 30, 2000, National sent its quarterly excise tax return to the IRS with
a check for $1,832,501.01 to pay those taxes. The IRS received and deposited the
check on December 4, 2000. However, National filed for Chapter 11 bankruptcy
on December 6, 2000, and, on the advice of counsel, closed its bank accounts to
establish new accounts for reorganization. The accounts were closed before the
check to the IRS had been debited, and payment to the IRS was refused.2 In the
period immediately following the bankruptcy filing, National made no efforts to
pay the excise taxes.
During bankruptcy, National regularly made bi-weekly payments of the
excise taxes it collected in the ordinary course of business. However, the
terrorist attacks of September 11, 2001, had a dramatic effect on the aviation
industry. In response to that problem, Congress passed the Air Transportation
Safety & System Stabilization Act, Pub. L. No. 107-42, 115 Stat. 230 (2001)
2
The unpaid taxes for the third quarter of 2000 will hereinafter be referred to as the
“pre-petition taxes.”
2
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(“Stabilization Act” or “Act”). One provision of the Act allowed airlines to defer
paying over the collected excise taxes until November 15, 2001. 49 U.S.C. §
40101. Pursuant to authority granted under the Stabilization Act, the IRS
extended the deferral to January 15, 2002. IRS Notice 2001-77, 2001-2 C.B. 576;
2001 IRB LEXIS 424. Many airlines also received direct infusions of money
under the Stabilization Act, including National, which received approximately
$21 million from the Government. On January 15, 2002, when the taxes for the
third quarter of 2001 became due, National filed an excise tax return, but did not
pay over the collected taxes, instead requesting a six-month extension for
payment. Similarly, on January 30, 2002, National sent in a tax return for the
fourth quarter of 2001 without payment.3
On November 6, 2002, National shut down all operations, and on May 7,
2003, National’s bankruptcy was converted to Chapter 7. Between May 2001
and its November 6, 2002 shutdown, National had receipts and outlays of
approximately $430 million.
On January 29, 2003, the IRS made a request for payment of the unpaid
excise taxes in the amount of $11,572,151.91. On March 14, 2003, the
Government sent Conway notice that it intended to seek to recover the unpaid
excise taxes from him personally. The Government made quick assessments
against Conway in the amounts of $148,325.00, $3,497,448.32, and
$4,803,626.85. On June 2, 2006, Conway made small payments towards the
excise taxes for each of the deficient quarters and filed for a refund of those
amounts. The refund was denied.
Conway filed suit in district court seeking a refund of the amounts paid
and an abatement of the amounts owing. The Government filed an answer and
counterclaim for the amount owing followed by a motion for summary judgment
3
Hereinafter, National’s unpaid excise taxes for the third and fourth quarters of 2001
are referred to as the “post-petition taxes.”
3
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on Conway’s liability for the unpaid excise taxes under § 6672. The district court
granted the motion and entered judgment for the Government in the amount of
$8,449,358.93 plus interest. Conway timely appealed.
II. Discussion
A. Standard of Review
This court reviews the district court’s grant of summary judgment de novo.
Staff IT, Inc. v. United States, 482 F.3d 792, 797 (5th Cir. 2007). Summary
judgment is appropriate where there is no genuine issue of material fact and the
moving party is entitled to judgment as a matter of law. Id. at 797-98.
The district court found that Conway was liable for National’s tax
deficiency under 26 U.S.C. § 6672(a), which provides:
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.
Liability under § 6672 thus is composed of two elements: (1) that the taxpayer
was a “responsible person,” and (2) that the taxpayer willfully failed to collect,
account for, or pay over such taxes. See Mazo v. United States, 591 F.2d 1151,
1153 (5th Cir. 1979). On appeal, Conway contests both that he was a responsible
person and that he willfully failed to account for or pay over the excise taxes for
both periods at issue.
B. Conway was a Responsible Person4
1. Pre-Petition
Conway first claims that he was not a responsible person under § 6672.
The Supreme Court has clarified that a “responsible person” is not limited to
4
Conway appears to have conceded this issue during oral argument. In the interests
of justice and because it was fully briefed, we address the argument briefly.
4
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persons “in a position to perform all three of the enumerated duties with respect
to the tax dollars in question.” Slodov, 436 U.S. at 250. Moreover, “[t]his circuit
takes a broad view of who is a responsible person under § 6672.” Logal v. United
States, 195 F.3d 229, 232 (5th Cir. 1999). We have enumerated six factors to
consider in determining whether someone is a responsible person under the
statute:
whether such a person: (i) is an officer or member of the board of
directors; (ii) owns a substantial amount of stock in the company;
(iii) manages the day-to-day operations of the business; (iv) has the
authority to hire or fire employees; (v) makes decisions as to the
disbursement of funds and payment of creditors; and (vi) possesses
the authority to sign company checks.
Barnett v. IRS, 988 F.2d 1449, 1455 (5th Cir. 1993). Each of these factors weighs
in favor of finding that Conway was a responsible person for the taxes at issue.
The undisputed record shows that Conway was the founder, CEO, president, and
chairman of the board of National during the periods in question; he was one of
the largest individual stockholders; and he had the most individual authority,
including the authority to hire and fire employees and to determine which
creditors would get paid. Conway was also authorized to sign checks on each of
National’s company accounts. No reasonable jury could find that Conway was
not a responsible person before National’s bankruptcy, so Conway was a
responsible person with regard to the pre-petition taxes. Thus, he had an
obligation to make sure were collected, paid over and accounted for by November
30, 2000, which was prior to National’s December 6 bankruptcy. See Mazo, 591
F.2d at 1154 (“[T]he liability of responsible persons generally is not limited to
restoring actual cash diverted from the trust; it encompasses the duty to have
initially or to collect funds to pay withholding taxes.”); Newsome v. United
States, 431 F.2d 742, 745 (5th Cir. 1970) (“[L]iability under section 6672 can also
be premised upon use of withheld funds for other corporate purposes before the
date for the corporation to pay over the funds.”(emphasis added)).
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2. During Bankruptcy
Furthermore, bankruptcy did not change Conway’s status as a responsible
person with regard to the post-petition taxes. Notably, Conway acknowledges
that during the bankruptcy, National continued to pay over the majority of its
excise taxes without needing approval of the bankruptcy court and concedes that
those excise taxes were paid in the normal course of business.5 We conclude
that the district court did not err in finding that Conway was a “responsible
person” under § 6672 for all periods at issue.
C. Conway Acted Willfully
1. The Nature of Reasonable Cause
Conway also disputes that his failure to pay over the taxes was willful. A
responsible person acts willfully if “he knows the taxes are due but uses
corporate funds to pay other creditors” or “he recklessly disregards the risk that
the taxes may not be remitted to the government.” Logal, 195 F.3d at 232.
When a responsible person becomes aware of tax liability, he has “a duty to
ensure that the taxes [are] paid before any payments [are] made to other
creditors.” Barnett, 988 F.2d at 1457. Where there is undisputed evidence that
5
Conway’s argument that the Stabilization Act converted the post-petition taxes into
something beyond “ordinary course” falls short on numerous levels. Conway has provided no
support for his argument that the deferral of the payment of excise taxes rendered their
eventual payment outside the course of ordinary business. Indeed, at the time of National’s
Chapter 11 proceedings, the bankruptcy court’s local rules provided that “[d]ebtors operating
businesses in cases under Chapters 7, 11, or 13 shall pay all taxes, fees, and other required
payments to governmental entities on a timely basis, except where otherwise ordered for good
cause shown.” Bankr. D. Nev. R. 960, subsequently amended, Bankr. D. Nev. R. 1015 (2009).
Even assuming arguendo that the payments did require approval of the bankruptcy court, this
requirement alone would not strip Conway of his responsible person status. See Neckles v.
United States, 579 F.2d 938, 940 (5th Cir. 1978) (“Although the appellant may not always have
had the ‘final’ say about paying creditors, in the apocalyptic sense of that word, he did have
significant control over disbursements.”); Barnett, 988 F.2d at 1455 (“[Section 6672] expressly
applies to ‘any’ responsible persons, not just to the person most responsible for the payment
of the taxes.”). At a minimum, Conway had the authority and duty to seek approval from the
bankruptcy court for payment of the post-petition taxes, a step that he has not shown that he
ever pursued. See Gustin, 876 F.2d at 492.
6
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the responsible person directed payments to other creditors while knowing of the
tax deficiency, willfulness is established as a matter of law. Id.; see also Howard
v. United States, 711 F.2d 729, 736 (5th Cir. 1983) (“A considered decision not
to fulfill one’s obligation to pay the taxes owed, evidenced by payments made to
other creditors in the knowledge that the taxes are due, is all that is required to
establish willfulness.”). However, evidence that the taxpayer acted with
reasonable cause can sometimes defeat a finding of willfulness. See Howard, 711
F.2d at 736 (“The failure to remit taxes under section 6672(a) is not willful if the
taxpayer can produce a ‘reasonable cause’ for this failure.”); Newsome, 431 F.2d
at 746. “[T]o further the basic purposes of section 6672, reasonable cause should
have a very limited application.” Newsome, 431 F.2d at 747 (internal citations
omitted); see also Logal, 195 F.3d at 233 (“‘[A]lthough we have recognized
conceptually that a reasonable cause may militate against a finding of
willfulness, no taxpayer has yet carried that pail up the hill.”’ (internal citation
omitted)).
Conway knew no later than January 19, 2001, when National filed a
bankruptcy schedule reflecting the unpaid taxes, that the pre-petition excise
taxes had not been paid. As to the post-petition taxes, Conway knew that they
had not been paid no later than January 15, 2002, when he signed a request for
an extension of time to pay over the taxes. National Airlines made payments in
excess of $220 million to creditors between February 2002 and November 2002,
far more than the approximately $8 million in unpaid excise taxes at issue in
this case. Thus, in the absence of reasonable cause, Conway’s willfulness is
established as a matter of law, and summary judgment on the issue is proper.
Conway raises several arguments to establish reasonable cause for his
failure to pay over the taxes. He argues that: (1) he relied on the advice of
counsel not to pay over the taxes, and thus had reasonable cause; (2) the
Stabilization Act justified National’s post-petition failure to pay even past the
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deadline set by the Act; (3) National lacked the unencumbered funds to pay the
taxes; and (4) he believed that National had fully paid the excise taxes and
otherwise lacked intent to avoid paying over the taxes. Conway also argues that
the district court conflated National’s tax liability with his personal liability for
the taxes. For the reasons discussed below, these arguments are not persuasive.
2. Reliance on Counsel6
Conway’s primary argument on appeal is that his failure to pay over the
taxes was based on reliance on the advice of counsel, and thus he had reasonable
cause. The advice of counsel may constitute reasonable cause under some
circumstances. Compare Newsome, 431 F.2d at 748 n.12 (“The term ‘reasonable
cause’ has been interpreted as advice by counsel under certain circumstances not
to pay the withheld taxes as they became due, advice of non-collection by
attorney and tax collector, [and] advice by counsel that there was no tax
liability.” (internal citations omitted)) with Logal, 195 F.3d at 233 (“No
[reasonable cause] defense may be asserted by a responsible person who knew
that the withholding taxes were due, but who made a conscious decision to use
corporate funds to pay creditors other than the government.”). However, cases
in which the taxpayer's reliance on the advice of counsel was found to have
provided reasonable cause have been cases in which the advice of counsel tended
to negate an element of willfulness under section 6672. See Gray Line Co. v.
Granquist, 237 F.2d 390, 395 (9th Cir. 1956) (noting that taxpayer relied upon
advice from counsel that no taxes were owed); Anderson v. United States, No.
19303, 1977 U.S. Dist. LEXIS 13860, at *7-10 (W.D. La. Sept. 22, 1977) (noting
that the taxpayer relied on the advice of counsel to structure bankruptcy estate
to prefer the Government to other creditors).
6
The parties dispute whether National’s reliance on counsel was properly presented
at the administrative hearings and thus whether the issue was waived under the variance
doctrine. Because we hold that Conway has failed to establish a genuine issue of material fact
as to his reliance on the advice of counsel, we do not reach the issue of variance.
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Conway has not raised a material fact issue supporting a finding that his
reliance on counsel’s advice provided reasonable cause so as to negate
willfulness. Regarding National’s pre-petition taxes, the only advice of counsel
found in the record is Chief Financial Officer Ray Nakano’s statement that
National’s bankruptcy counsel advised National to close its then current bank
accounts and open new ones as a debtor in possession. As a result of National’s
following of this advice, the checks sent to the IRS were not paid (though there
is no indication counsel knew of this consequence). Such advice is not the
equivalent of advice that the taxes were not owed, and thus does not constitute
reasonable cause for purposes of § 6672. See Newsome, 431 F.2d at 747-48 (“[The
taxpayer] was not advised, nor did he interpret the advice as meaning, that he
had been justified in using withheld taxes during December and January to pay
other creditors or that he should continue to pay creditors with funds then
available . . . instead of paying the government.”). Therefore, Conway has failed
to put forward any evidence that National relied on counsel’s advice so as to
have reasonable cause for its failure to pay the pre-petition taxes.
Similarly, there is no evidence in the record that National’s failure to pay
its post-petition taxes was due to reliance on the advice of counsel. Conway’s
reference to a few vague and conclusory statements of reliance in the record falls
far short of pointing to specific substantive evidence that would support a
conclusion that the taxes were not owed. While there is some evidence that
counsel told management what debts to pay, no evidence suggests that counsel
advised that preferring other creditors would not subject National’s officers to
personal liability for the excise taxes. See Newsome, 431 F.2d at 748 (holding
that an attorney’s advice to execute a chattel mortgage in favor of the taxpayer’s
bank did not provide reasonable cause where “the attorney did not advise [the
taxpayer] that he could prefer the bank over the United States without
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subjecting himself to section 6672 liability”). Nor is there evidence of any
specific attorney stating that excise taxes were simply not owed.
At best for Conway, the advice of counsel argument requires that the
responsible person actually and reasonably rely on advice that is actually given.
Cf. United States v. Boyle, 469 U.S. 241, 252 (1985) (“The failure to make a
timely filing of a tax return is not excused by the taxpayer’s reliance on an agent,
and such reliance is not ‘reasonable cause’ for a late filing under § 6651(a)(1).”).
In light of the undisputed evidence that Conway knew the taxes were due and
continued to favor other creditors, as well as our precedents establishing the
exceedingly limited nature of the “reliance on counsel as reasonable cause”
defense, we hold that Conway has failed to put forward evidence of his reliance
on the advice of counsel such as would establish reasonable cause under § 6672.
3. Stabilization Act
Conway argues that even if personal liability would normally attach under
these circumstances, the court should find that this case is extraordinary
because of the September 11 terrorist attacks and the subsequent Stabilization
Act. Generally, it is not a defense to liability under § 6672 that payment of the
collected taxes would threaten the continued existence of the business entity.
See Bowen, 836 F.2d at 967 (stating that the taxpayers’ use of the collected taxes
for other corporate expenses “made the United States ‘an unwilling joint
venturer in the corporate enterprise’” (internal citations omitted)); see also Mazo,
591 F.2d at 1154 (“[I]f a corporation has only sufficient cash to pay net wages,
and does so, there may literally be no funds to constitute the corpus of the trust,
but the responsible persons are nevertheless liable for failure to collect the
withholding taxes.”). Conway argues, however, that the Stabilization Act
authorized National to use the withheld taxes as working capital.
We disagree. Nothing in the plain language of the Act evinces an intent
to allow the airlines to use the excise taxes as working capital. By the plain
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terms of the Stabilization Act, its effect was to allow airlines to defer paying over
the collected excise taxes until January 15, 2002, as authorized by the IRS.
Because these taxes are collected from passengers, and were not intended to
become the property of National, more than a mere statutory deferral of
payment would be required to evince an intent to allow the collected taxes to be
used for operational purposes. Because the plain language of the statute is
unambiguous, we need not examine the legislative history.7 Similarly, nothing
in the act demonstrates congressional intent to render payment of the excise
taxes beyond the ordinary course of business.
4. Other Arguments
Conway also argues that his failure to pay over the taxes was not willful
because National lacked the unencumbered funds to pay the excise taxes after
they became due and because he believed that payment for the taxes had
successfully been arranged at the time that he left National.
Conway has the burden of raising a fact issue that would support a
conclusion that the funds paid to other creditors were encumbered. See Barnett,
988 F.2d at 1458 (“We next observe that the burden to prove that the loan
proceeds and accounts receivable deposited into the Company’s bank accounts
. . . were ‘encumbered’ falls on [the taxpayer.]”). In this circuit, funds are
encumbered when “restrictions preclude a taxpayer from using the funds to pay
the trust fund taxes.” Id.; see also Honey v. United States, 963 F.2d 1083, 1090
(8th Cir. 1992) (“[F]unds are encumbered only where the taxpayer is legally
obligated to use the funds for a purpose other than satisfying the preexisting
7
See Tidewater Inc. v. United States, 565 F.3d 299, 303 (5th Cir. 2009). Furthermore,
were we to consider the legislative history, it does not change our analysis. Conway points to
a few sparse statements in the legislative history that the Stabilization Act was intended to
financially benefit the airlines. It is probable that these statements refer to other provisions
of the act which allowed for direct payments to the airlines, and under which National
received $21 million.
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employment tax liability and if that legal obligation is superior to the interest
of the IRS in the funds.”). However, as the district court found, Conway has
submitted no evidence that the funds paid to other creditors had a legal priority
over the unpaid excise taxes. Therefore, Conway has not met his burden of
raising a fact issue on encumbrance.
Conway also argues that he did not act willfully in regard to the pre-
petition taxes because, at the time he left National, he believed he had arranged
for those taxes to be paid. Noting that corporate officers have a duty to ensure
that payment is made, we have repeatedly rejected the argument that a
taxpayer’s good faith belief that payment for the taxes had been arranged is a
defense to personal liability under § 6672. See Mazo, 591 F.2d at 1157; see also
Bowen, 836 F.2d at 968 (finding that a taxpayer acted willfully despite the
taxpayer’s good faith belief that it would be able to obtain a loan to pay over the
tax liabilities). While Conway may have had earnest intentions to pay back the
taxes, willfulness does not require an intent “to defraud or to deprive the United
States of taxes.” See Gefen v. United States, 400 F.2d 476, 482 n.7 (5th Cir.
1968). As discussed above, it is sufficient that other creditors were consciously
preferred to the United States. Id.
Finally, Conway’s argument that the district court conflated National’s tax
liability with Conway’s personal liability is frivolous in light of the district
court’s proper conclusion that Conway was a responsible person and that he
willfully failed to pay over the taxes.8
III. Conclusion
For the foregoing reasons, we AFFIRM the district court’s summary
judgment.
8
For the first time in his reply brief, Conway asserted many new arguments, including
the IRS’s alleged failure to abide by its collection procedures. Arguments raised for the first
time in a reply brief are forfeited. See Yohey v. Collins, 985 F.2d 222, 225 (5th Cir. 1993).
12