Petition for Writ of Certiorari — McDonald v. United States

@le 1243 | Supreme Court, WS

RFiriLep

JAN 29 1992

OFFICE GF THE CLisk

No.

IN THE

Supreme Court of the Hnited States

OcTOBER TERM, 1992

KENNETH LEE MCDONALD,

Petitioner,

VS.

THE UNrrED STATES OF AMERICA,

Respondent.

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

JOHN R. BENN

ATTORNEY AT LAW

3901 Hatch Boulevard

Sheffield, Alabama 35660

(205) 386-7685

Attorney for Petitioner

St. Louis Law Printing,Inc. 13307ManchesterRd. St. Louis,MO 63131 314-231-4477

|

QUESTIONS PRESENTED

Whether the Court of Appeals for the Eleventh Circuit has

abandoned the “personal fault” requirement for imposing Sec-

tion 6672 penal liability required by this Court in Slodov v.

United States, 436 U.S. 236 (1978).

des Tee

PARTIES TO THE PROCEEDING

The petitioner in this application for a wnit of certiorari to review

the reversal of a jury verdict in a tax assessment case by the

Eleventh Circuit Court of Appeals is Kenneth L. McDonald. The

respondent is the United States of America.

— lli—

TABLE OF CONTENTS

2

2

2

A. Course of Proceedings Below ...............c0.0000 4

SB. Statement of The Facts ........................ stiri 5

7

7

D. Decision of The Court of Appeals...................

REASONS FOR GRANTING THE WRIT OF

CERTIORARI

I. Certiorari Should Be Granted To Review the

Abrogation of the Slodov “Personal Fault”

Requirement for Section 6672 Penalty Liabil-

ity By The Court of Appeals For The Eleventh

NA EERNAS SR et eR 9

A. “Personal fault” is a necessary require-

ment for the imposition of Section 6672

i a rc iat nceca enansdnicepbonionnnenne 9

— oe

B. The Court of Appeals failed to give due

regard to the jury decision that “personal

REE WIE BOE ICI ss isicsevsscsinsssessreess 16

STE ctnsciunncenibhse-detiapdelihiniackidatintdibiigiinsnaniinnineeen 18

FP NEED sisiscininccininasuinieasidinnnininnanunamie A-1

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i i *

TABLE OF AUTHORITIES

Page(s)

Cases:

Anderson v. City of Bessemer City, North Carolina, 470

See GE DEED nic asses atiaitecatierchosd omar ceial 18

Amadeo v. Zant, 486 U.S. 214 (1988) wo... ceceeeceeeeee 17

Bowen v. United States, 836 F.2d 965 (Sth Cir.1988).. 16

Browning-Ferris Industries of Vermont, Inc. v. Kelco

Disposal, Inc., 492 U.S. 257 (1989) ......cccccccecceeees 17

Collins v. United States, 894 F.2d 740 (6th Cir.

| nee ih RACAL ML hy ARCS 16

George v. United States, 819 F.2d 1008 (11th Cir.

PT Biciscinisciouiussettecialioneaiatiiaaai cc cane eee 8

Hochstein v. United States, 900 F.2d 543 (2nd Cir.

PPD circles dihedinsein tenis iia rn 16

Inwood Laboratories, Inc. v. Ives Laboratories, Inc.,

ae Re, Ge COND citdinene 17

McDonald v. United States, 939 F.2d 916 (11th Cir.

PAD ssh vnicictiitiibiisagsicinumnivaiamabankena tara 3,13,16

McDonough Power Equipment, Inc. v. Greenwood, 464

U.S. 548 (1984) ............ sshiibipiscdaiialdice dees Leta che 17

Roth v. United States, 779 F.2d 1567 (11th Cir.

PD ssscscsnsandieteneibiiaalai ecole var iae eee 3,16

Slodov v. United States, 436 U.S. 238 (1978) ............ 2,8,10,12

Smith v. United States, 894 F.2d 1549 (11th Cir.

IPED insssicsiniiitiabisietisebiaisenpae a tee tour ee 13,16

— ee

Thibodeau v. United States, 828 F.2d 1499 (11th Cir.

PEPEEY Piccsnncuiess A ncensutatenniaitbaiasieiguomsaaamadawnaetuatamuiaatan 3,16

United States v. Energy Resources Co., Inc., 495 U.S.

ED chistidiiadninsinnnigheaiagapeaimansinniaiadadantaa tits 10

United States v. Sotelo, 436 U.S. 268 (1978) ............... 11,12

Wainwright v. Sykes, 433 U.S. 72 (1977) ......ccceeceeeeeeee 18

Williams v. United States, 931 F.2d 805 (11th Cir.

PIED sininictiinicnisenn claiasiachanseabicceangncnanmmmaeenanaaan 3,7,9,13,16

Statutes:

Act of Aug. 14, 1935, ch. 531, § 807(c), 49 Stat. 620,

TIE asascvcantsiahiniesentsseelsnonidgesmenaanavancaa nasa melanie 11

Revenue Act of 1918, ch. 18 § 1308, 40 Stat. 1057,

BE kacdoesceisninnncicsdietananss\ausiicelaiatiateieaeae 11

Miscellaneous:

Hungerford, Howard v. United States: Who Should Be

Responsible For The 100 Percent Penalty?, 12 VU.

Puget Sound L. Rev. 451 (1989) ..............ssossessoseee 12

Moran, Willfulness: The Inner Sanctum or Unnecessary

Element of Section 6672, 11 U. Tol. L. Rev. 709

CDI ich insissscanitaeciashiestesviastaniamannaammeuianames aes 11

eee = en SS Se eee

Ane Cama angtne eee

No.

IN THE

Supreme Court of the United States

OcTOBER TERM, 1992

KENNETH LEE MCDONALD,

Petitioner,

VS.

THE UNITED STATES OF AMERICA,

Respondent.

ON WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

Petitioner requests that a writ of certiorari be issued to review

the judgment and opinion of the United States Court of Appeals

for the Eleventh Circuit, entered in the above proceedings on

August 21, 1991, and for which Rehearing was denied on

October 31, 1991.!

OPINIONS BELOW

The opinion of the Court of Appeals is reported at 939 F.2d

916 (11th Cir. 1991) and is reprinted in the appendix hereto, p.

A-3—A-8, infra. There was no opinion issued by the United

' This case ostensibly represents the first petition for review by a taxpayer

having a jury verdict in his favor reversed by an appellate court filed since this

Court’s decision in Slodov v. United States, 436 U.S. 236 (1978).

ee. pee

States District Court in denying the Government’s request for a

new trial and for a judgment notwithstanding the verdict in favor

of petitioner.

JURISDICTION

The decision of the Court of Appeals was entered on August

21, 1991, and the request for Rehearing was denied on October

31, 1991. This Court has jurisdiction to review the decision of

the Court of Appeals by writ of certiorari pursuant to 28 U.S.C.

§ 1254(1).

STATUTORY PROVISIONS INVOLVED

This case involves Section 6672 of the Internal Revenue Code

of 1954 (26 U.S.C.). Under this section a person is personally

liable for unpaid taxes withheld from the earnings of employees

if he is an officer or an employee of a corporation who is under

a duty to collect and pay over the taxes to the government. A

responsible person who willfully fails to collect, account for, or

remit the withheld taxes is subject to the penal provisions of

Section 6672. The relevant statutory provisions involved in this

petition, including Section 7501, are reprinted in the appendix

hereto, pp. A-1—-A-2, infra.

STATEMENT OF THE CASE

The issue raised in this Petition is of great importance to the

hundreds of taxpayers involved in Section 6672 litigation against

the federal government each year. The present case typifies the

ongoing erosion of the “personal fault” requirement that this

Court found necessary in Slodov v. United States, 436 U.S. 238

(1978) in order to support the penal sanctions of Section 6672.

Indeed the present direction of decisions from the Court of

Appeals for the Eleventh Circuit is to abrogate “personal fault”

requirement and transform Section 6672 into an alternate collec-

—=

tion mechanism by making it a civil, strict liability statute. This

mistaken interpretation and refusal to follow the stated require-

ments in the Slodov decision will impose the severe penalties of

Section 6672 against taxpayers who are faultless or powerless

when creditor banks step in and effectively exercise complete

financial management over corporate affairs.

After the Slodov decision the Court of Appeals for the Elev-

enth Circuit has somewhat consistently substituted its appellate

judgment of the facts for that of the jury by reversing jury

verdicts in favor of the taxpayer. Williams v. United States,? 931

F.2d 805 (11th Cir. 1991); Smith v. United States, 894 F.2d 1549

(11th Cir. 1990); Thibodeau v. United States, 828 F.2d 1499

(11th Cir. 1987); Roth v. United States, 779 F.2d 1567 (11th Cir.

1986). The “personal fault” requirement of Slodov has been

diminished to the point in which “knowledge” alone suffices to

impose the Section 6672 penalty.

? The Williams case represents the grossest injustice toward a taxpayer of

all of the decisions from the Court of Appeals for the Eleventh Circuit to date.

In Williams the depository, creditor bank refused to accept the corporation’s

withholding tax deposits. Thereafter the corporation mailed the withholding

tax payments directly to the IRS. The depository, creditor bank returned these

checks for insufficient funds. At the same time the depository, creditor bank

held effective management control over the decisions as to which payments

to creditors would be accepted. The corporation’s bank account also was

garnished by a corporate creditor. The IRS did not pursue the depository,

creditor bank for its role in selectively paying certain creditors, instead

assessing the Section 6672 against only the corporate officers.

In Petitioner’s case the panel relied exclusively on the Williams decision

noting “[bJecause the facts in Williams are so similar to those in this case, we

find that we are bound to follow the result in Williams.” McDonald, 939 F.2d

at 919.

— pon

A. Course of Proceedings Below

Petitioner filed this suit to recover $48,746.08 which he had

paid on a penalty of $111,511.13 imposed against him pursuant

to Section 6672 of the Internal Revenue Code of 1954. The

penalty was assessed for his failure to collect and pay over

federal employment taxes withheld from the wages of the

employees of Environmental Protection Systems, Inc. (hereinaf-

ter referred to as “EPS”’) for the first, third and fourth quarters of

1984. The United States filed a counterclaim against Petitioner

for the unpaid balance of the assessment.

The case was tried to a jury which returned special interroga-

tory answers that Petitioner did not act “willfully” with respect

to the stated quarters. The jury returned answers to the following

Special Interrogatories:

With respect to the tax period involving the Third Quarter of

1984 —

INTERROGATORY NO. 1: Do you, the jury, find that Mr.

McDonald was a person required to collect, truthfully

account for, or pay over taxes to the government during the

third taxable quarter of 1984?

RESPONSE: YES.

INTERROGATORY NO. 2: Do you, the jury, find that Mr.

McDonald acted willfully in failing to collect, truthfully

account for or pay over taxes to the government during the

third taxable quarter of 1984?

RESPONSE: NO.

INTERROGATORY NO. 3: If you have determined that

Mr. McDonald after learning of the tax deficiency know-

ingly allowed payments to other creditors of Environmen-

tal Protection Services, Inc., while acting as a responsible

am

person for EPS, what was the total amount of said pay-

ments?

RESPONSE: $62,781.55.

INTERROGATORY NO. 4: Do you, the jury, find that Mr.

McDonald was a person required to collect, truthfully

account for, or pay over taxes to the government during the

fourth taxable quarter of 1984?

RESPONSE: YES.

INTERROGATORY NO. 5: Do you, the jury, find that Mr.

McDonald acted wilifully in failing to collect, truthfully

account for or pay over taxes to the government during the

fourth taxable quarter of 1984?

RESPONSE: NO.

Based upon the jury responses the district court entered a

judgment in favor of Petitioner on his claim for refund and in

Petitioner’s favor on the Government’s counterclaim. The

Government, having moved for a directed verdict, thereafter

moved for judgment notwithstanding the verdict which was

denied on July 5, 1990.

The Government perfected an appeal to the Court of Appeals

for the Eleventh Circuit challenging the denial of the directed

verdict and judgment notwithstanding the verdict on the issue of

Petitioner’s “willfulness.” On August 21, 1991, the appellate

panel reversed the jury verdict and remanded the case for entry

of a judgment notwithstanding the verdict against Petitioner for

payroll taxes for the third and fourth quarters of 1984. Rehearing

and En Bank consideration were subsequently denied.

B. Statement of the Facts

Petitioner was president and a one-third owner of Environ-

mental Protection Systems, Inc., (“EPS”), a Tennessee corpora-

ae eae

tion engaged in asbestos removal projects. While Petitioner was

president the day-to-day administration of the corporation’s

financial affairs were handled by the company’s comptroller.

Petitioner’s role as president was mostly the result of require-

ments by the company’s bonding surety.

The banking and credit extensions to EPS’s were handled by

First Alabama Bank of Athens, Alabama. With respect to each

of the quarters involved in the Section 6672 penalties, First

Alabama held a security interest in all accounts receivable,

contract rights, inventory and chattel paper. First Alabama Bank

was also the depository institution for EPS’ operating and

payroll account. The bank also served as a depository for the

EPS withholding tax deposits.

Petitioner first learned that there were delinquent tax pay-

ments in a meeting at First Alabama Bank in August 1984.

During that meeting, the company comptroller for the first time

displayed to the officers of EPS a series of checks he had written

for federal tax deposits but which First Alabama Bank refused to

process. From that time forward, the bank president made the

decisions on what checks drawn by EPS would be honored. The

bank president refused to honor timely issued checks for with-

holding tax payments from the EPS checking accounts.

Petitioner introduced each and every check written by EPS

from both the Operating and Payroll accounts for the year 1984.

Aside from two checks signed by Petitioner in early 1984, none

of the over 6,000 checks were signed by him. Further Petitioner

never approved any of the checks that were issued after July,

1984, when the bank assumed control. The undisputed testi-

mony also established that Petitioner took no funds out of EPS

for his own personal use. The practical realities once the bank

assumed control over EPS’s receivables were that Petitioner had

no viable voice to override what the bank elected to pay or not

pay.

aa, pe

The uncontradicted facts also showed that at the point in time

which Petitioner first learned of the tax deficiency, there were no

unencumbered funds available or sufficient to pay the delinquent

taxes. The Government offered no witnesses in ine presentation

of its case. The Government’s sole evidence was the introduc-

tion of the assessment notice as a documentary exhibit to the

case.

C. Decision Of The District Court

The district court in denying the Government’s request for

new trial and for judgment notwithstanding the verdict did not

issue any memorandum opinion. The jury found through special

interrogatories that Petitioner was a “responsible person” with

respect to EPS’ nonpayment of withholding taxes but that he did

not act “willfully” as required by Section 6672.

D. Decision Of The Court of Appeals

On August 31, 1990, the Government appealed the district

court’s denial of a new trial and denial of judgment notwith-

standing the verdict. On August 21, 1991, the Court of Appeals

for the Eleventh Circuit reversed the district court and remanded

the case for entry of a judgment notwithstanding the verdict in

favor of the United States and against Petitioner. The Court of

Appeals held that in view of the recently announced decision in

Williams v. United States, 931 F.2d 805 (11th Cir. 1991) and the

similarity of facts between the cases that it was bound to follow

the result in Williams. The Court of Appeals held that in

situations in which creditor banks assume full and effective

control over the financial management of the corporation’s

affairs, including the decision of which creditors to pay, that

knowledge by the taxpayer without affirmative action is suffi-

cient to impose the civil pénalty provisions of Section 6672.

a

The Court of Appeals denied Rehearing and En Banc consid-

eration on October 31, 1991, despite the apparent conflict within

the Circuit’ and the holding by this Court in Slodev v. United

States, 436 U.S. 238 (1978) that Section 6672 penalties are

predicated upon a requirement that “personal fault” be present.

> There is a striking and irreconcilable conflict between the Court of

Appeals decision in George v. United States, 819 F.2d 1008 (11th Cir. 1987)

and the Williams/McDonald decisions. In George the Court of Appeals

chastised the district court for not permitting the jury to decide the issue of the

taxpayer’s “willfulness.” The Court of Appeals relied heavily upon the facts

that the taxpayer did not prepare or file the payroll tax returns and that the

taxpayer had not appropriated any corporate assets for his own benefit. /d. at

1013. The Court of Appeals held unequivocally that “the question of the

taxpayer’s willfulness requires a factual determination which should have

been made by the jury.” /d. at 1014.

Despite these same factors being present in both Williams and McDonald

the Court of Appeals chose to intervene in the factual determination of these

cases to set aside the jury’s determinations on the “willfulness” issue.

Moreover, both Williams and McDonald exhibited significant exculpating

circumstances not present in George — the intervention and assumption of

complete financial control by depository, creditor banks.

REASONS FOR GRANTING

THE WRIT OF CERTIORARI

The question presented in this Petition falls within the grounds

for securing the issuance of a Writ of Certiorari provided by Rule

17.1(c). The Court of Appeals for the Eleventh Circuit has

decided a federal question in a way that conflicts with applicable

decisions of this Court. There is a conflict between this Court’s

decision in Slodov and the underlying decision of the Eleventh

Circuit Court of Appeals. The conflict is both direct and

apparent in that the Eleventh Circuit has now abrogated the

requirement announced in Slodov that “personal fault” must

exist before Section 6672 civil penalties apply. The combination

of the Eleventh Circuit’s decision in this case and their decision

in Williams v. United States, 931 F.2d 805 (11th Cir.1991) has

transformed Section 6672 into a civil strict liability collection

statute instead of the civil penalty statute for which it was

intended. This Court should exercise its supervisory authority to

issue a uniform rule and correct the misapplication of Section

6672.

I

CERTIORARI SHOULD BE GRANTED

TO REVIEW THE ABROGATION OF THE SLODOV

“PERSONAL FAULT” REQUIREMENT FOR SECTION

6672 PENALTY LIABILITY BY THE COURT OF

APPEALS FOR THE ELEVENTH CIRCUIT.

A. “Personal Fault” is a necessary requirement for the

imposition of Section 6672 penalty liability.

This Court should grant the writ of certiorari in order to

resolve a fundamental erosion of the “personal fault” require-

ment found by this Court to be an essential and necessary

— oe

element before the penal provisions of Section 6672 apply. The

lower appellate courts have since this Court’s decision in Slodov

v. United States, consistently eroded the benchmark requirement

of “personal fault” to the extent that a taxpayer’s mere knowl-

edge that the involved corporation had defaulted in payment of

withholding taxes while payment was made to other creditors is

sufficient to impose the penalty.

Section 6672 of the Internal Revenue Code provides for the

assessment of a 100% penalty against responsible persons who

willfully fail to collect and pay over the “trust fund” portion of

the employment tax.* The penalty is assessed for the failure to

collect and pay over the tax imposed upon another where there

is a statutory duty to collect and withhold taxes and pay them

over. The penalty is 100% of the amount of tax which is not

collected, or not accounted for and paid over, and is in addition

to any other penalties that may be assessed. The penalty has been

traditionally assessed against officers or directors of a corporate

employer when the corporation defaults in payments of with-

holding taxes. “Should employers fail to pay trust fund taxes, the

Government may collect an equivalent sum directly from the

officers or employees of the employer who are responsible for

collecting the tax.” United States v. Energy Resources Co., Inc.,

495 U.S. 545, 547 (1990).

There are two elements of liability under Section 6672 before

the penalty can be imposed. First, the person upon whom

liability is to be imposed must have been a person required to

* Because the employment taxes which are withheld from the wages of

employees are considered to be held in trust for the Government under I.R.C.

Section 7501, the general terminology is to refer to these taxes as “trust-

funds.” United States v. Energy Resources Co., Inc., 495 U.S. 545, 546

(1990).

The full provision of I.R.C. Section 6672(A) is set forth in the Appendix

at page A-1.

|

collect, account for and pay over any tax — a “responsible

person.” The second is that such a responsible person must have

“willfully” failed to collect and pay over the taxes. As Justice

Marshall noted:

No corporate officers, regardless of title, can be held liable

under Internal Revenue Code § 6672 unless his position

was sufficiently important that he was “required to collect,

truthfully account for, and pay over “withholding taxes”

and unless he “willfully fail[ed]” to meet one or more of

these obligations.

United States v. Sotelo, 436 U.S. 268, 280 (1978).

Section 6672 is a penalty provision and not an alternate tax

collection device. As Justice Rehnquist has observed the penalty

provision of Section 6672 “imposes a potentially crushing liabil-

ity on corporate officials — a liability that is nondischargeable

(in bankruptcy) in its entirety and virtually in perpetuity.”

Sotelo, 436 U.S. at 290 (Rehnquist, J., dissenting).

The legislative history of Section 6672 confirms the penal

nature of the statute. Nearly identical language to the present

Section 6672 first appeared as a criminal provision in Section

1308 of the Revenue Act of 1918 applying to excise taxes.

Revenue Act of 1918, ch. 18 § 1308, 40 Stat. 1057, 1143. In 1935

the Social Security Act incorporated all of the penalties for

excise taxes and made them applicable to the social security

taxes. Act of Aug. 14, 1935, ch. 531, § 807(c), 49 Stat. 620, 638.

Congress in 1954 reorganized the Internal Revenue Code. The

100 percent penalty was removed from the other criminal pen-

alties since it did not provide for imprisonment. As part of this

restructuring, the 100 percent penalty was renumbered as Sec-

tion 6672 and placed alongside the other relevant sections

imposing civil penalties.» See Moran, Willfulness: The Inner

* The civil penalty imposed by Section 6672 can far exceed the maximum

(Footnote 5 continued on next page)

i

Sanctum or Unnecessary Element of Section 6672, 11 U. Tol. L.

Rev. 709 (1980).

This Court has always recognized that Section 6672 was

intended by Congress to be a “penalty” and not a “tax” collecting

device. As Chief Justice Rehnquist has reflected:

The liability imposed [by Section 6672] is specifically

denominated a “penalty” and, absent any indication to the

contrary, Congress is presumed to know the meaning of the

words it uses, especially in highly complex and intricate

statutory schemes.

Sotelo, 436 U.S. at 286-87 (Rehnquist, J., dissenting).

The Court in its seminal Section 6672 decision in Slodov v.

United States, 436 U.S. 238 (1978) recognized the penal nature

of the 100 percent penalty and stated categorically that the

penalty would not apply absent “personal fault” by the taxpayer.

In relevant language the Court stated:

Section 6672 cannot be read as imposing upon the respon-

sible person an absolute duty to “pay over” amounts which

should have been collected and withheld. The fact that the

provision imposs a “penalty” and is violated only by a

“willful failure is itself strong evidence that it was not

intended to irapose liability without personal fault. Con- .

gress moreover, has not made corporate officers personally

liable for the corporation’s tax obligations generally, and §

6672 therefore should be construed in a way which respects

Footnote 5 Continued)

criminal penalty for fraud or tax evasion. The maximum criminal penalty

fortax fraud or evasion is generally $100,000 whereas the Section 672 penalty

is unlimited. Hungerford, Howard v. United States: Who Should Be

Responsible For the 100 Percent Penalty?, 12 U. Puget Sound L. Rev. 451

(1989). The penalty assessed against Petitioner exceeded $100,000.

=,

that policy choice. The Government’s concession — that

§ 6672 does not impose a duty on the responsible officer to

use personal funds or even to liquidate corporate assets to

satisfy the tax obligations — recognizes that the “pay over”

requirement does not impose an absolute duty on the

responsible person to pay back taxes.

Id. at 254.

The Court of Appeals for the Eleventh Circuit in Williams v.

United States, 931 F.2d 805 (11th Cir. 1991) and McDonald v.

United States, 939 F.2d 916 (11th Cir. 1991), has now abrogated

the requirement that “personal fault” exist and has transformed

Section 6672 into an alternate tax collection device. Despite

facts in each case that creditor banks took over the financial

management of the corporate employer and that the assessed

taxpayer was powerless to,contramand the decisions as to which

creditors to pay, the Court of Appeals for the Eleventh Circuit

has now determined that “knowledge” alone can suffice to

impose the penalty. The appellate court has used the “knowl-

edge” sword to thwart jury determinations that “willful” conduct

as envisioned by Section 6672 did not exist under the facts of

each case.

The Court of Appeals decision in Williams served as the

principal controlling authority basis for the appellate court’s

reversing the judgment in favor of Petitioner at trial. McDonald,

939 F.2d at919. In Williams the taxpayer’s supposed “persona!

fault” for the nonpayment of withholding taxes was exhibited in

the following conduct:

The federal employment taxes withheld from the wages of

AIR employees in the third quarter of 1983 were due to be

paid in October, 1983. Accordingly, AIR submitted these

tax payments directly to the Bank for deposit in an Internal

Revenue Service (“IRS”) account. However, on several

occasions the Bank would not accept these withholding tax

_

payments because AIR’s account did not contain sufficient

funds. When this occurred, House informed Boles and

Tony Cashio (“Cashio”), a commercial loan officer at the

Bank, that because they had chosen to extend credit to AIR

for the amount of the payroll checks, they also must extend

credit for the withholding tax payments. When the Bank

remained reluctant to accept the withholding tax payments,

House mailed payments directly to the IRS. However,

because the Bank continued to sweep AIR’s account,

several checks made payable to the IRS were returned for

insufficient funds. When House learned that AIR’s with-

holding tax payments were past due, he again spoke to

Cashio and Boles about their failure to make funds avail-

able for withholding tax payments.

The Bank demanded full payment of AIR’s outstanding

loans on January 26, 1984. Because AIR was unable to

meet this demand, the Bank placed AIR into “liquidation

mode.” The Bank contacted AIR’s account debtors, in-

structing them to remit their payments directly to the Bank.

", he Bank deposited the amounts received in AIR’s general

depository account, swept the account, and applied most of

the money to pay down AIR’s loans from the Bank. The

Bank also allowed payments to AIR’s employees and to

those of AIR’s creditors whose continued services were

necessary for AIR to remain in business. During this time,

House met with Boles on several occasions, attempting to

make withholding tax payments on behalf of AIR. Boles

would not accept the tax deposit checks, claiming that after

the Bank swept AIR’s account there was money sufficient

to satisfy only AIR’s payroll expenses, not the outstanding

withholding taxes.

Id. at807-08. Against this evidentiary record it is easy to discern

how a jury could reach the conclusion that the taxpayer’s

conduct was not “willful” as required under Slodov.

ia ies

The factual record in Petitioner’s case is no less offending to

the “personal fault” requirement. As noted by the appellate court

on the critical factual issues —

* “First Alabama informed EPS that EPS would have to

find another source for funds to cover the payroll taxes. As

a practical matter, however, EPS had little opportunity to

locate other sources of credit because First Alabama held

security interests in all of the company’s contracts and

income. Payments from customers to EPS were going

directly to First Alabama, which applied the money to

reduce EPS’s outstanding debt.” 939 F.2d at 918.

* “Although EPS continued to issue checks on a weekly

basis to cover its federal employment tax deposits the bank

declined to honor them. However, the bank honored other

checks payable to creditors whose services were necessary

to maintain EPS’s operations.” Jd.

* “McDonald asserted, however, that First Alabama, not

EPS, was responsible for the company’s payroll tax default

because the bank controlled the company’s funds and

advanced only enough money to pay net wages. McDonald

attempted to establish that the tax deficiency was not due to

any action by EPS, but to the bank’s selective decisions to

refuse to honor checks issued by EPS to pay federal em-

ployment taxes.” Jd.

It is noteworthy that in view of Petitioner’s trial presentation the

Government offered no witnesses to support its counterclaim

and summarily rested after introducing a copy of the Section

6672 assessment into evidence. Not surprisingly the jury found

that Petitioner’s conduct did not constitute “willfulness” under

the statute. The district court also concurred with the jury by

denying the Government’s post trial motions.

The Williams and McDonald decisions are reflective of a

mounting trend by the appellate courts toward discarding “per-

—

sonal fault” and permitting Section 6672 to serve as aconvenient

collection device for unpaid taxes. At the very least, the Court

should grant certiorari to forestall the further transformation of

Section 6672 away from its penal intent. The harsh and unin-

tended consequences of appellate courts applying Section 6672

in situations where faultless taxpayers have their decisions and

authority usurped by creditor banks — institutions not pursued

by the IRS — certainly justifies review by this Court.

B. The Court of Appeals failed to give due regard to

the jury decision that “personal fault” was not

present.

The Court of Appeals for the Eleventh Circuit has principally

led the appeliate way in converting Section 6672 from a civil

penal provision into a collection device employable by the

Internal Revenue Service to recoup delinquent employment

taxes. McDonald v. United States, 939 F.2d 916 (11th Cir.

1991); Williams v. United States, 931 F.2d 805 (11th Cir. 1991);

Smith v. United States, 894 F.2d 1549 (11th Cir. 1990); Thibodeau

v. United States, 828 F.2d 1499 (11th Cir. 1987); Roth v. United

States, 779 F.2d 1567 (11th Cir. 1986). While the Eleventh

Circuit has pioneered the elimination of “personal fault” as a

requirement, other courts of appeal have also begun following

the path. See Hochstein v. United States, 900 F.2d 543 (2nd Cir.

1990); Collins v. United States, 894 F.2d 740 (6th Cir. 1988);

Bowen v. United States, 836 F.2d 965 (Sth Cir. 1988).

Each of these cases bear a striking resemblance. In each case

the jury as the ultimate fact finder found the requirements for

imposing the Section 6672 penalty against the taxpayer were not

present in the Government’s case.® Further, the district courts

from their supervisory positions over the trial proceeding have

* In many cases, such as Petitioner’s, the Government’s sole evidence

consists of the introduction of the Notice of Tax Assessment.

a

thrice declined to overrule the fact finding of the jury. The

district courts denied motions for directed verdicts, motions for

judgments notwithstanding the verdicts, and motions for new

trials. In each case the appellate courts overrode these trial

determinations directing the imposition of the Section 6672

penalty.

The intervention by a court of appeals to overturn a determi-

nation by the fact-finder is suspect. The Court has Clearly

delineated that the federal appellate courts may set aside findin gs

of fact only if they are “clearly erroneous.” Amadeo v. Zant, 486

U.S. 214, 222 (1988). Likewise, after a district court reviews the

fact finding by the jury and determines that the jury determina-

tion is within the confines of applicable law, the appellate courts

may only reverse under an abuse-of-discretion standard. Brown-

ing-Ferris Industries of Vermont, Inc. v. Kelco Disposal, Inc.,

492 U.S. 257, 279 (1989); McDonough Power Equipment, Inc.

v. Greenwood, 464 U.S. 548, 556 (1984).

As Justice O’Connor has noted:

By rejecting the District Court’s findings simply because it

would have given more weight to evidence of mislabeling

than did the trial court, the Court of Appeals clearly erred.

Determining the weight and credibility of the evidence is

the special province of the trier of fact.

Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S.

844, 856 (1982). Justice White echoed this standard when he

wrote for the Court:

This standard plainly does not entitle a reviewing court to

reverse the finding of the trier of fact simply because it is

convinced that it would have decided the case differently.

The reviewing court oversteps the bounds of its duty under

Rule 52(a) if it undertakes to duplicate the role of the lower

court.

— po

Anderson v. City of Bessemer City, North Carolina, 470 U.S.

564, 573 (1985).

The present trend of these Section 6672 cases in the appellate

courts is to make the district court proceedings a mere “tryout on

the road” rather than the “main event” for the fact finding. See

Wainwright v. Sykes, 433 U.S. 72,90 (1977). The appellate

courts are now improperly conducting what amounts to de novo

weighing of evidence.

CONCLUSION

For the foregoing reasons, Petitioner respectfully prays that

this Court issue a wmit of certiorari to review the judgment of the

Court of Appeals for the Eleventh Circuit.

Dated: January 28, 1992

Sheffield, Alabama

Respectfully submitted,

John R. Benn

Counsel of Record

3901 Hatch Boulevard

Sheffield, AL 35660

(205-386-7685)

Attorney for Petitioner

Kenneth L. McDonald

APPENDIX

No.

IN THE

Supreme Court of the United States

OcToBER TERM, 1992

KENNETH LEE MCDONALD,

Petitioner,

VS.

THE UNrTeD STATES OF AMERICA,

Respondent.

APPENDIX TO

PETITION FOR WRIT OF CERTIORARI TO

THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

JOHN R. BENN

ATTORNEY AT LAW

3901 Hatch Boulevard

Sheffield, Alabama 35660

(205) 386-7685

Attorney for Petitioner

APPENDIX TABLE OF CONTENTS

STATUTORY PROVISION INVOLVED

Section 6672 of the Internal Revenue Code of 1954

| SE

Section 7501 of the Internal Revenue Code of 1954

A ae

OPINION OF THE UNITED STATES COURT OF

APPEALS FOR THE ELEVENTH CIR-

CUIT, August 21, 1991 (939 F.2d 916) .......cccccce..

A-1

A-2

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APPENDIX A

THE INTERNAL REVENUE CODE OF 1954 (26 U.S.C.)

SECTION 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,

Publ. L. No. 95-628, 92 Stat. 3624] 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 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.

a ae

APPENDIX B

THE INTERNAL REVENUE CODE OF 1954 (26 U.S.C.)

SECTION 7501. 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.

— = ae

APPENDIX C

Kenneth Lee McDONALD,

Plaintiff-Counter-Defendant, Appellee,

V.

UNITED STATES of America,

Defendant-Counter-Plaintiff, Appellant.

No. 90-7631.

United States Court of Appeals,

Eleventh Circuit.

Aug. 21, 1991.

Appeal from the United States District Court

for the Northern District of Alabama.

Before ANDERSON and DUBINA, Circuit Judges, and

GIBSON, Senior Circuit Judge. [Honorable Floyd R. Gibson,

Senior U.S. Circuit Judge for the Eighth Circuit, Sitting by

designation]

PER CURIAM:

In this appeal, the United States seeks reversal of a judgment

absolving appellee Kenneth McDonald from liability under §

6672 of the Internal Revenue Code for nonpayment of federal

employment taxes from the wages of the employees of Environ-

mental Protection Systems, Inc., a company that McDonald

partially owned and of which he was president. The district court

entered judgment in favor of McDonald on the basis of special

interrogatory findings by a jury that although McDonald was

responsible for the withholding and payment of the unpaid

employment taxes, he had not “willfully” failed to pay them. The

United States argues that the evidence presented at trial estab-

lished that McDonald acted “willfully” as a matter of law and,

therefore, that the district court erred in denying the government’ s

a eee

motions for directed verdict and for judgment notwithstanding

the verdict at the close of trial. We reverse the district court and

remand for entry of judgment in favor of the United States.

FACTS

Appellee Kenneth McDonald was president and on-third

owner of Environmental Protection Systems (“EPS”), a Tennes-

see corporation formed in 1983 to perform on-site labor under a

contract between the State of Alabama and Acoustical Installers,

Inc. (“Acoustical”), an asbestos removal firm of which McDonald

was also president and part owner. Although McDonald was

president of EPS, Johnny Pitmon, the comptroller, handled the

day-to-day administration of the company’s finances.

In April of 1984, McDonald, acting as president of Acoustical

and EPS, negotiated and executed a financing contract with First

Alabama Bank of Athens, Alabama (‘First Alabama”). Under

the contract, First Alabama agreed to provide EPS with a

$350,000 line of credit in exchange for security interests in all of

EPS’s accounts receivable, contract rights, inventory and chattel

paper. The bank also required that any future payments from the

State of Alabama to EPS be made payable jointly to Acoustical

and First Alabama. The chief purpose of this line of credit was

to provide short-term funding for EPS’s operations until the

company received payment for its work. The State of Alabama,

for which EPS performed most of its work, was often slow to

make payment, and the credit line enabled EPS to meet its

operating expenses in the interim.

With respect to the withholding and payment of federal

employment taxes, EPS’s line of credit operated as follows. EPS

had two accounts at First Alabama, one for general operating

expenses and another for payroll. When EPS requested a “draw”

from its line of credit, First Alabama deposited money into EPS’s

general operating account. If a payroll distribution was ap-

— * oe

proaching, EPS issued two separate checks from its general

operating account. EPS issued the first check in an amount equal

to the net wages of all of its employees and deposited the check

into the payroll account. Individual paychecks for each em-

ployee were then drawn from the payroll account. EPS issued

the second check from the general operating account in an

amount equal to the total federal employment taxes due from its

payroll and deposited this check at First Alabama, an authorized

federal depository for holding withheld employment taxes.

In July of 1984, First Alabama expressed concern that EPS

was overextended and that its line of credit would not be repaid.

The president of First Alabama notified McDonald and other

officers of EPS that henceforth the bank would loan EPS only

enough money to cover the company’s “net” payroll, that is,

enough money to cover the employees’ net wages but not the

additional amount necessary to cover the withholding for their

federal employment tax. First Alabama informed EPS that EPS

would have to find another source for the funds to cover the

payroll taxes. As a practical matter, however, EPS had little

opportunity to locate other sources of credit because First Ala-

bama held security interests in all of the company’s contracts and

income. Payment from customers to EPS were going directly to

First Alabama, which applied the money to reduce EPS’s out-

standing debt.

Despite its problems, EPS remained in business, with First

Alabama’s approval, until late 1984. During this time, the

company continued to pay wages to its employees for their work

in completing projects already in progress. First Alabama either

deposited money directly into EPS’s payroll account or permit-

ted EPS to overdraw its payroll account in amounts sufficient to

pay the employees’ net wages. Although EPS continued to issue

checks on a weekly basis to cover its federal employment tax

deposits, the bank declined to honor them. However, the bank

honored other checks payable to creditors whose services were

necessary to maintain EPS’s operations.

—~ oa

Due to EPS’s failure to pay its federal employment taxes, the

IRS assessed a penalty against McDonald under I.R.C. § 6672 in

the amount of $111,511.13, the total of the unpaid withholding

taxes for the first, third and fourth quarters of 1984. McDonald

paid a portion of this penalty and subsequently filed this action

in federal district court contesting his liability and requesting a

refund of the amount he had paid. The United States filed a

counterciaim against McDonald for the unpaid portion of the

penalty.

COURSE OF PROCEEDINGS

This case was tried before a jury in federal district court. At

trial, EPS comptroller Johnny Pitmon testified that the first

period for which EPS failed to deposit its federal employment

withholding taxes was the week of July 13, 1984. Pitmon

testified that McDonald knew in July of 1984 that the withhold-

ing taxes were delinquent, that the company did not have the

money to pay them, that the bank would not advance money for

that purpose, and that EPS paid other creditors while the taxes

remained unpaid. Gary Newby, a shareholder and officer of

EPS, testified similarly regarding McDonald’s awareness of the

tax deficiency.

McDonald testified that he had learned of the tax delinquency

in July of 1984 at a meeting between the president of First

Alabama and the officers of EPS, including himself. He further

testified that EPS had continued to pay wages to its employees

after he had learned of the company’s inability to pay its federal

employment withholding tax, thereby becoming increasingly

delinquent. McDonald asserted, however, that First Alabama,

not EPS, was responsible for the company’s payroll tax default

because the bank controlled the company’s funds and advanced

only enough money to pay net wages. McDonald attempted to

establish that the tax deficiency was not due to any action by

EPS, but to the bank’s selective decisions to refuse to honor the

checks issued by EPS to pay federal employment taxes.

Say 'S, ee

At the close of evidence, the United States moved for a

directed verdict, arguing that the evidence had established as a

matter of law that McDonald was a “responsible person” for the

unpaid withholding taxes for the third and fourth quarters of

1984 and that his failure to pay was “willful.” The district court

denied this motion. [The government also argues that the district

court erred in instructing the jury that First Alabama’s behavior

toward EPS could establish a defense of reasonable cause to the

government’s allegation that McDonald’s failure to pay was

willful. Because we reverse this case on other grounds, we need

not reach this issue.] The jury found through special interroga-

tories that McDonald was a “responsible person” with respect to

EPS’s nonpayment of federal withholding taxes but that he had

not acted “willfully” in defaulting on the tax payments. In

accordance with those findings, the district court entered judg-

ment in favor of McDonald, refunding to him the amount that he

had already paid to the government and dismissing the

government’s counterclaim for the remaining balance of the §

6672 penalty. The district court subsequently denied the United

States’ motion for either judgment notwithstanding the verdict

or a new trial. This appeal follows.

DISCUSSION

The dispositive issue in this case is whether the government

established as a matter of law that McDonald’s failure to remit

federal employment taxes was “willful” under § 6672. The

government argues that the district court erred in denying its

motion for a judgment notwithstanding the verdict because the

evidence at trial established that McDonald was aware that EPS

had defaulted on its federal payroll taxes and that EPS neverthe-

less continued to operate and to pay other creditors while the

taxes remained unpaid. The government asserts that once

McDonald’s knowledge of these facts is proven, McDonald’s

failure to remit payroll taxes was “willful” as a matter of law. See

Smith v. United States, 894 F.2d 1549, 1553 (11th Cir.1990).

aa Seen

McDonald’s sole argument is that his nonpayment of payroll

taxes was not willful because First Alabama held complete

control over EPS’s money. In Williams v. United States, 931

F.2d 805 (11th Cir.1991), a recent panel of this court expressly

rejected the same argument. Because the facts in Williams are

so similar to those in this case, we find that we are bound to

follow the result in Williams. Therefore, we hold that McDonald

“willfully” failed to remit federal payroll taxes as a matter of law

because he was aware that EPS had defaulted in its payment of

employment taxes and nevertheless acquiesced in EPS’s contin-

ued payment to other creditors while the taxes remained unpaid.

For the foregoing reasons, the judgment of the district court is

reversed and this case is remanded for entry of a judgment

notwithstanding the verdict in favor of the United States and

against McDonald to reflect his liability for payroll taxes for the

third and fourth quarters of 1984.

REVERSED and REMAND