Opinion
CASE NO. 4:08CV201.
January 29, 2010
REPORT AND RECOMMENDATION OF UNITED STATES MAGISTRATE JUDGE
The United States of America has filed a motion for summary judgment contending that Plaintiff Michael Conway is a responsible person pursuant to 26 U.S.C. § 6672 for the unpaid excise taxes of National Airlines, Inc. ("National"), a company which he founded. (Dkt. 67). As set forth below, the Court finds that the motion should be GRANTED.
This civil action was initiated by Michael Conway contesting his status as a responsible person for the payment of National's excise taxes. National began flying in 1999 and was in bankruptcy by December 2000. In keeping with its intent that no person or business should escape taxes, Congress has levied excise taxes against the airline. On the IRS Form 720 for excise taxes, there are numerous categories assessed, including environmental, communications and air transportation, fuel, retail, ship passenger, other excise, luxury, manufacturers, foreign insurance, sport fishing equipment, outboard motor, bows, arrow components, inland waterways, fuel use, and alcohol sold but not used as fuel tax, not to mention floor stocks tax.
In this case, the United States (or the Government) filed a counterclaim for $8,449,358.93, which is the unpaid balance of the assessments against plaintiff. The amount of taxes listed as due for the last two quarters are taken directly from the Form 720s filed by National. The Government contends that Conway was, among other roles, the chief executive officer and ultimate decision maker of National for the three quarters at issue. The Government alleges that Conway also allowed "hundreds of millions" of dollars of payments to creditors other than the United States, including himself, after he knew there were unpaid excise taxes.
This amount does not include the interest that has accrued, and will continue to accrue, as a matter of law since the dates of the assessments against Conway. 26 U.S.C. §§ 660, 6621.
Conway argues that he was not a responsible person as contemplated by the Act, and, in any event, the failure to pay was not wilful. Conway also argues that his lack of wilfulness stems from advice of counsel and that the excise taxes deferred by Congress after the senseless and repugnant terrorist attacks of September 11, 2001 excuse payment.
The Government argues that the following facts demonstrate that Conway is a responsible person and therefore liable for the unpaid taxes. According to the summary judgment record, Conway was the founder of National; he was also the chief executive officer, president and chairman of the board of directors of National during all the periods in question. As stated in National's disclosure statement from its bankruptcy, "National was founded in April 1995 by Michael Conway, its current Chairman of the Board, President and Chief Executive Officer." According to Conway's deposition, he knew when he started National that airlines had to collect excise taxes and pay them over to the United States. Summary judgment evidence also indicates that Conway personally hired high level employees, such as Raymond Nakano and the senior vice-president of legal and human resources, Kevin Tourek. Conway also had the authority to fire employees, and the senior executives at National reported directly to him. Conway reported to no one, except the board of directors that he chaired.
Evidence before the Court indicates that Conway was the person who lined up the initial investors for National and was the ultimate decision maker. Conway himself testified that his salary was more than double that of any other employee of National, and he conceded that he was the highest paid employee. Schedule E of the 2000 Form 1120 shows that Conway received a salary of $546,639.00. The next highest salary, according to the summary judgment record, is that of Mr. Nakano, who made $204,651.00. In the years after National's bankruptcy filing, according to his own deposition testimony, Mr. Conway received the following wages:$154,748.00 TOTAL $1,070,664.00
In its brief, the Government meticulously cited to each piece of evidence which it contends demonstrates that Conway is a responsible person.
In addition to the continued payment of Conway's salary, over $400,000,000.00 was deposited in National bank accounts after it appears that Conway knew of the unpaid excise taxes. Over $400,000,000.00 was also paid to creditors other than the IRS after Conway knew of the unpaid excise taxes. Specifically, the front pages from National's account at Bank of America alone for the period from May 1, 2001 — November 30, 2002 show that National had both deposits and expenditures for this time period in excess of $400,000,000.00.
The summary judgment record indicates that Conway was one of the largest individual stockholders of National and was an authorized check signer on every company checking account. He ran the day-to-day operations of National. After he knew of the unpaid excise taxes, Conway testified, he continued to receive his salary. In his deposition, Conway also testified that he also personally paid, authorized and/or acquiesced in the payment of millions of dollars to creditors other than the IRS. Conway has conceded that he never ordered his employees to pay the taxes before anything else. According to the summary judgment evidence, Conway had access to the excise tax returns and every other document at National and signed the Form 720 for National for the quarter ended June 30, 2002, as well as a Form 1127 requesting more time to pay the excise taxes that were due for the second quarter of 2002.
Evidence before the Court indicates that Conway had the authority to decide which creditors to pay and determine overall corporate financial policy and that, if the company did not have enough money to pay all its bills, Conway had the authority to determine which ones did were paid. In his own deposition, Conway admitted that the excise taxes National collected were not segregated into separate bank accounts. During their depositions, Nakano and Frost both confirmed that the funds were not segregated.
The summary judgment record — including the testimony of Lum, Nakashima, Frost, Nakano, and Conway himself — indicates without question that Conway was the individual with the most authority at National. As stated by Mr. Nakano, "everyone" knew the Conway was the "number one guy in charge."
On December 6, 2000, National filed a voluntary Chapter 11 bankruptcy in Nevada, where the company was headquartered. According to Conway's testimony, the possibility of filing bankruptcy had been discussed "at least a month or two" before it was actually filed. Conway further testified that National's bankruptcy did not change his role in the company. According to the summary judgment evidence before the Court, Conway remained the CEO, president, and board chairman until he left the company in late 2002 — well after the periods at issue in this case.
According to Conway, National never made a profit for an entire year. During its first seven months of actual flying, National had a net loss of $33,100,000, for the 2000 fiscal year, National had a net loss of $35,100,000, and, for the partial year ended September 30, 2001, National had a net loss of approximately $26,800,000.
In National's bankruptcy, the IRS filed an administrative claim for payment that totaled $11,225,347.23, the vast majority of which was the unpaid excise taxes for the last two quarters of 2001. In his deposition, Conway admitted that National never objected to that claim "[N]or did we ever dispute that we owed the money." The Chapter 7 trustee agreed that the IRS administrative claim should be allowed in its entirety, and an Order was entered in National's bankruptcy establishing this fact.
In addition, the IRS filed a priority proof of claim in National's bankruptcy for the unpaid pre-petition excise taxes for the third quarter of 2000. This proof of claim is included in the summary judgment record and reflects an unpaid balance for the third quarter of 2000 of $1,832,501.01. This is the exact amount that National admitted was owed on its bankruptcy schedules. According to the summary judgment record, there was never any objection to the IRS's proof of claim in National's bankruptcy.
On p. 3, footnote 3, of the attachment to the Form 1127, Application for Extension of Time for Payment of Tax, Conway noted that National was given a $20.1 million subsidy "from the United States government under the Act," and that this $20,100,000.00 need not be paid back.
It is undisputed that the "Act" Conway referred to is the Air Transportation Safety and System Stabilization Act, which will be discussed below.
As Conway states in paragraphs 13 — 15 of his Complaint, on or around March 14, 2003, the IRS notified him of the Proposed Assessment of Trust Fund Recovery Penalties, and on May 9, 2003, the he timely appealed the proposed assessments. Then, according to Conway, on March 23, 2006, the IRS Appeals Office notified him that it had rejected his administrative appeal and that the TFRP assessments would be made against him. On page 1 of Schedule A attached to the Form 843 Claim for Refund and Request for Abatement, plaintiff's counsel admits that he had received the IRS Form 2751, Proposed Assessment of the Trust Fund Recovery Penalty.
The IRS Appeals Officer assigned to work Conway's protest was Stephen Sein. In his Affidavit, Mr. Sein states that he notified Conway and his then attorney of his final administrative determination to uphold the assessments on March 13, 2006.
According to the IRS Forms 4340, Certificate of Assessments, Payments, and Other Specified Matters included in the summary judgment record, Conway was subsequently assessed for each quarter at issue on March 28, 2006, within the thirty days allowed under 26 U.S.C. § 6672(b)(3)(B). The amount of the assessments for the last two quarters of 2001 are based on the Excise Tax Returns filed by National. The assessments equal the amounts National admitted were not paid. An Affidavit of Sandy Mikkelsen, an IRS employee at the Ogden Service Center where the assessments were made, is attached as Exhibit 29 to the Government's Motion. Ms. Mikkelsen is the Lead Officer of the Revenue Accounting Team in the Ogden Service Center. Part of her job responsibilities include being familiar with the procedures employed at the Service Center for the making and recording of assessments.
While National was already in bankruptcy, the terrorist attacks of September 11, 2001 occurred. These attacks had a dramatic effect on this nation's airlines. Airplanes were grounded, and the commercial aviation industry came to a standstill. Because of this national crisis, the government passed the Air Transportation Safety and System Stabilization Act ("the Act"), which allowed airlines to defer payment of the excise taxes collected from ticket purchasers. 49 U.S.C. § 40101.
The United States contends that it was commonly understood at National that this law merely deferred the due date for making the excise tax payments and that the excise taxes for the last two quarters of 2001 did need to be paid. However, in this case, Conway claims that the law passed by Congress to assist airlines in the short-term meant that the amounts need never be paid. Conway admitted at his deposition that no employee of the United States ever told him that the excise taxes need never be paid.
Conway argues that National timely filed its excise tax return for the third quarter of 2000 and submitted a check to the IRS for payment at that time. However, before the IRS submitted the check for payment, National went into bankruptcy and National was advised to close most of its accounts. Conway claims he had no ability to correct the problem. He also claims that his authority changed significantly after the bankruptcy filing. He states that he advised his employees to keep the IRS advised of all proceedings. Conway claims that, after 9/11, it was his understanding that the airlines could use the deferred excise tax payments as operating capital or expenses. Conway also argues (rather inconsistently) that the "9/11 taxes" were an extraordinary payment which could only be made with bankruptcy court approval and that National filed excise tax returns with no payment, keeping the IRS informed. Conway argues that, as National's demise after reorganization became evident, bankruptcy counsel never included the 9/11 taxes on a list of payments that would be required. Conway maintains that, although most pre-petition and post petition taxes were paid, no effort was made to pay the 9/11 taxes because Conway was advised that the 9/11 taxes should be treated differently than the taxes for other periods. Eventually, National's bankruptcy was converted to a Chapter 7.
In reviewing Section 301(a) of the Air Transportation Safety and System Stabilization Act (PL 107-42), the Court finds no support for Conway's assertion that National was excused from payment of excise taxes. The Act merely allows an extension of due date for excise tax deposits. Yet, Conway argues that the Stabilization Act changed the status of excise taxes from trust funds to short term loans which, in effect, made the Government a partner with the airlines. Relying on counsel's advice, he did not pay the excise taxes. Of course, even under a partnership analysis which the Court does not buy, a partner is generally jointly and severally liable for debts of the partnership. See generally TEX. REV. CIV. STAT. ANN. art. 6132b-3.04 (Vernon Supp. 2008).
The Government counters that the doctrine of variance bars Conway from arguing that he relied on counsel since this was not raised in the administrative proceedings. See Mallette Bros. Const. Co., Inc. v. U.S., 695 F.2d 145 (5th Cir. 1983). Absent a waiver by the Government, a taxpayer is barred from raising in a refund suit grounds for recovery which had not previously been set forth in its claim for a refund. See Angelus Milling Co. v. Commissioner, 325 U.S. 293, 295-99, 65 S. Ct. 1162, 1163-65, 89 L. Ed. 1619 (1945); United States v. Felt Tarrant Mfg. Co., 283 U.S. 269, 272-73, 51 S.Ct. 376, 377-78, 75 L.Ed. 1025 (1931); Group Life Health Ins. Co. v. United States, 660 F.2d at 1058-59; Southwestern Life Ins. Co. v. United States, 560 F.2d at 630-32. The alleged error must be clearly and specifically set forth in the refund claim; a generalized plea of error will not suffice. See Angelus Milling Co., 325 U.S. at 296-97, 65 S. Ct. at 1164-65; Felt Tarrant Mfg. Co., 283 U.S. at 272, 51 S. Ct. at 377; Stoller v. United States, 444 F.2d 1391, 1393 (5th Cir. 1971).
The Court agrees that, up until the filing of the Complaint, there was little to put the Government on notice that an advice of counsel defense was asserted. The only advice of counsel matter raised was that National was told to close its checking accounts when it filed bankruptcy, which led to the insufficient funds to pay for the excise taxes for one of the quarters at issue here. However, the Court will consider this argument and finds that variance does not preclude Conway from raising this issue.
First, his pleadings clearly set forth his position that he relied on counsel. When the Government filed its amended answer it failed to raise the issue as an affirmative defense. Where the claim for refund states general grounds for relief, an item raised in litigation, but not specifically mentioned in the claim will be permitted if the taxpayer adequately alerted the IRS to the fact that the item is a ground for refund. Helis v. Usry, 496 F.2d 1319, 1321 (5th Cir. 1974).
Here, Conway stated he was not a responsible person. He mentions in his protest letter that, on advice of counsel, National's accounts were closed as a result of bankruptcy. He specifically refers to advice of counsel exonerating him as a responsible person in his complaint and no affirmative defense of variance is raised by the Government. The Court finds that the issue of advice of counsel was no surprise to the Government and in any event by not raising it sooner has waived any challenge to Conway's reliance on it.
SUMMARY JUDGMENT STANDARD
Summary judgment is appropriate when, viewing the evidence and all justifiable inferences in the light most favorable to the non-moving party, there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. FED. R. CIV. P. 56(c); Hunt v. Cromartie, 526 U.S. 541, 549, 119 S. Ct. 1545, 143 L. Ed.2d 731 (1999). The appropriate inquiry is "whether the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 106 S. Ct. 2505, 91 L. Ed.2d 202 (1986).
The party moving for summary judgment has the initial burden to prove there are no genuine issues of material fact for trial. Provident Life Accident Ins. Co. v. Goel, 274 F.3d 984, 991 (5th Cir. 2001). In sustaining this burden, the movant must identify those portions of pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 325, 106 S. Ct. 2548, 2553, 91 L. Ed.2d 265 (1986). The moving party, however, "need not negate the elements of the nonmovant's case." Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc). The movant's burden is only to point out the absence of evidence supporting the nonmoving party's case. Stults v. Conoco, Inc., 76 F.3d 651, 655 (5th Cir. 1996).
In response, the nonmovant's motion "may not rest upon mere allegations contained in the pleadings, but must set forth and support by summary judgment evidence specific facts showing the existence of a genuine issue for trial." Ragas v. Tennessee Gas Pipeline Co., 136 F.3d 455, 458 (5th Cir. 1998) (citing Anderson, 477 U.S. at 255-57, 106 S. Ct. at 2513-14). Once the moving party makes a properly supported motion for summary judgment, the nonmoving party must look beyond the pleadings and designate specific facts in the record to show that there is a genuine issue for trial. Stults, 76 F.3d at 655. The citations to evidence must be specific, as the district court is not required to "scour the record" to determine whether the evidence raises a genuine issue of material fact. E.D. TEX. LOCAL R. CV-56(d). Neither "conclusory allegations" nor "unsubstantiated assertions" will satisfy the nonmovant's burden. Stults, 76 F.3d at 655.
ANALYSIS
The Government points out that motions for summary judgment are frequently granted in Section 6672 cases. Mazo v. United States, 591 F.2d 1151 (5th Cir. 1979) (duty to apply any available unencumbered funds to reduction of accrued withholding tax liability whether or not those funds are deemed to be trust funds); Rineer v. United States, 594 F. Supp.2d (N.D. Tex. 2009); Verret v. United States, 542 F. Supp.2d 526 (E.D. Tex. 2008); Sutton v. United States, 194 F. Supp.2d 559 (E.D. Tex. 2001). See also Frey v. United States, 2001 WL 493136 (N.D. Tex. 2001); Morgan v. United States, 937 F.2d 281 (5th Cir. 1991); Howard v. United States, 711 F.2d 729 (5th Cir. 1983); Lencyk v. Internal Revenue Service, 384 F. Supp.2d 1028 (W.D. Tex. 2005).
All of the above cases involve individuals assessed pursuant to Section 6672 for unpaid employment taxes. However, the law is identical for individuals assessed pursuant to Section 6672 for unpaid excise taxes. Ferguson v. United States, 484 F.3d 1068 (8th Cir. 2007); see also Jones v. United States, 60 F.3d 584 (9th Cir. 1995) (individual, who ran an airline in Las Vegas, liable for periods prior to appointment of bankruptcy trustee); Cross v. United States, 311 F.2d 90 (4th Cir. 1962).
Section 4261 requires airlines to collect excise taxes every time they sell a plane ticket. See 26 U.S.C. § 4261. The money collected from ticket buyers is then held by the employer in trust ("trust fund monies") for the benefit of the United States as provided for by 26 U.S.C. § 7501(a). Slodov v. United States, 436 U.S. 238, 242-43 (1978); Barnett, 988 F.2d at 1453; Turnbull v. United States, 929 F.2d 173 (5th Cir. 1991); Howard, 711 F.2d at 733. Airlines are then required to pay over the collected excise taxes to the United States. Cf. Wood v. United States, 808 F.2d 411, 414 (5th Cir. 1987).
The undisputed material facts set forth above render Conway liable as a matter of law and the inquiry should end here. However, as discussed below, Conway makes an argument apparently never before made, that a law delaying payment of certain excise taxes, excused payment altogether. Conway has not cited any authority that agrees with his interpretation of the law. He thus seeks to escape approximately $8,500,000 in assessments, plus millions of dollars in interest against him personally.
The question comes down to whether this national emergency excused payment. As the Court has noted, the Act merely deferred deposits and the Court can find no responsible authority that this deferral excused payment of excise taxes. Congress, not the Court, is responsible for this decision, and no Congressional intent has been demonstrated in support of Conway's position.
If the excise taxes are not paid by the airline, this revenue would be forever lost to the Government unless the Government can collect these taxes from the persons responsible for the collection and nonpayment of the taxes. Slodov, 436 U.S. at 243-45; USLIFE Title Ins. Co. of Dallas v. Harbison, 784 F.2d 1238, 1242-43 (5th Cir. 1986). To protect against such revenue losses, Section 6672(a) was enacted by Congress. USLIFE Title, 784 F.2d at 1243. Section 6672 reads, in pertinent part:
(a) GENERAL RULE. — Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over . . .26 U.S.C. § 6672.
There are two elements to liability under Section 6672. The first is that a person upon whom liability is to be imposed must be a person required to collect, truthfully account for, or pay over any tax, commonly referred to as a "responsible person." The second requirement under Section 6672 is that such responsible person willfully failed to collect, truthfully account for or pay over such taxes. Barnett, 988 F.2d at 1453; Turnbull, 929 F.2d at 178; Wood, 808 F.2d at 414. Conway has the burden of proof on the issue of wilfulness. See Mazo, 591 F.2d at 1157.
Section § 6671(b) defines a person as follows:
The term "person," as used in this subchapter, includes an officer or employee of a corporation, or a member or employee of a partnership who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs.
In Slodov, when interpreting § 6672, the Supreme Court held that:
We conclude therefore that the phrase "[a]ny person required to collect, truthfully account for, and pay over any tax imposed by this title" was meant to limit § 6672 to persons responsible for collection of third-party taxes and not to limit it to those 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 (emphasis added). "An individual need not engage in all three of the activities listed in the statute in order to be held liable; involvement in any one of the three named activities is sufficient." Verret, 542 F. Supp.2d at 533 ( citing Slodov, 436 U.S. at 250). As set forth below, the Court finds that Conway was clearly a responsible person.
Conway was the chief individual responsible for the overall business of National. At all relevant times, he was the chief executive officer, president and chairman of National's board of directors. He was the ultimate financial decision maker for National. He was an authorized check signer and could hire and fire employees.
It was Conway who testified on behalf of National's reorganization plan in bankruptcy court, and who gave sworn declarations in support of the plan. Moreover, Conway was the only National employee that signed the Disclosure Statement filed with the bankruptcy court. It was Conway who tried to negotiate additional sources of capital for National. It was Conway who issued the press release to the public and the notice to National's employees when he decided to close the business.
"This 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); Barnett, 988 F.2d at 1454; Gustin v. United States, 876 F.2d 485, 491 (5th Cir. 1989). The crucial inquiry is whether the individual had the effective power to pay the taxes. Barnett, 988 F.2d at 1454; Turnbull, 929 F.2d at 178; Howard, 711 F.2d at 734. "Within this Circuit, cases not finding § 6672 responsibility are relatively few and far between." Barnett, 988 F.2d at 1456 (emphasis added).
Responsibility for purposes of Section 6672 is a matter of status, duty, power and authority, whether exercised or not. Wood, 808 F.2d 415; Howard, 711 F.2d at 734. It is not necessary that an individual have the final, or sole, word as to which creditors should be paid in order to be subject to liability under Section 6672. Verrett, 542 F. Supp.2d at 534. In fact, "responsibility does not require knowledge that one has that duty and authority." Barnett, 988 F.2d at 1454. Rather, it is sufficient that the person have some power, authority, and control over the process by which corporate funds are disbursed to find that he is a "responsible person" under § 6672. Neckles v. United States, 579 F.2d 938 (5th Cir. 1978).
Responsible person status is not limited to people who perform the mechanical jobs of collection and payment of corporate funds. The Fifth Circuit, like other circuits, looks at a number of circumstantial indicia of responsible person status when a party lacks the precise responsibility of withholding or paying the taxes. Barnett, 988 F.2d at 1455. In Barnett, the Court noted:
[W]e cannot ignore the extensive case law that narrowly constrains a factfinder's province in § 6672 cases. Thus, although the facts are critical in any § 6672 cases, we tend to agree with the other circuits that have held that certain facts will almost invariably prove dispositive of responsibility.Barnett, 988 F.2d at 1454 (internal quotation and citations omitted). Recognized indicia of responsible person status include the following:
We ask 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. No single factor is dispositive.Id. at 1455 (internal citations omitted). Having applied the summary judgment evidence before it to these indicia, the Court finds that Conway is clearly a responsible person under Section 6672 as a matter of law.
Even though a responsible person, Conway is only liable if he wilfully failed to pay taxes. Liability attaches to a "responsible person" under § 6672 only upon his "willful" failure to collect or account for or pay over the excise taxes. A responsible person acts willfully if he knows the taxes are due but uses corporate funds to pay other creditors, Barnett, 988 F.2d at 1457; Gustin v. U.S., 876 F.2d 485, 492 (5th Cir. 1989), or if he recklessly disregards the risk that the taxes may not be remitted to the government. Gustin, 876 at 492. A responsible person who learns of the underpayment of taxes must use later-acquired unencumbered funds to pay the taxes; failure to do so constitutes willfulness. Barnett, 988 F.2d at 1458; Logal, 195 F.3d at 232 (emphasis added).
As stated above, according to the summary judgment evidence, at the absolute latest, Conway knew by December 6, 2000, that excise taxes were not being timely paid. December 6, 2000 was the date that National filed bankruptcy. On its bankruptcy schedules, National lists the IRS as a priority claimant for unpaid excise taxes for the third quarter of 2000 in the amount of $1,832,501.01. Yet, as indicated by a Form 4180 submitted by the Government, Conway admitted in his interview with the IRS on January 30, 2003 that after he knew of the unpaid excise taxes creditors other than the IRS were paid for "NORMAL COURSE OF BUSINESS EXPENSES IN CONNECTION WITH CHAPTER 11 REORGANIZATION." (Capital letters in original). In that form, he also admitted that he was one of the individuals authorizing the payment of these creditors. As stated by the Fifth Circuit in Mazo:
Once they were aware of the liability to the government, they were under a duty to ensure that the taxes were paid before any payments were made to other creditors. If, after receiving actual notice, corporate officials could once again delegate their responsibility to subordinates, then repeated escape from liability would be possible and the government would be required to monitor corporate affairs daily. The statutory concept of willfulness conveys no such meaning.Mazo, 591 F.2d at 1157. This duty has been noted numerous times since Mazo.
For example, when granting summary judgment in favor of the United States, the District Court in the Western District of Texas noted:
Once Ortiz became aware of the tax liability, he had a duty to ensure that the taxes were paid before any payments were made to other creditors. The IRS's evidence, that he failed to do so, establishes willfulness as a matter of law.Lencyk v. Internal Revenue Service, 384 F. Supp.2d 1028, 1036 (W.D. Tex. 2005) (internal citations and quotations omitted) (emphasis added).
Against this rather overwhelming evidence against him, Conway argues that he is not a responsible person because he relied on advice of counsel. The advice of counsel advice was first raised by Conway in his letter of protest. It was raised, however, only as to the advice to close the current accounts of National. Nothing in the letter states that Conway has relied on advice of counsel in not paying excise taxes.
In his answers to interrogatories, Conway states that all payments to creditors were made on advice of counsel or with Court approval. Conway states that he kept the IRS apprised of his ability to make payments for taxes. He states that the pleadings in Bankruptcy Court listed the unpaid taxes to the IRS.
The summary judgment evidence before the Court indicates that Conway was aware of the 2000 unpaid excise taxes at the time National took bankruptcy. In his deposition, he admits to meeting with the IRS and discussing how to repay the excise taxes. There is nothing in his deposition that states he was advised by counsel not to pay or that he believed that he did not have to pay excise taxes.
On January 15, 2002, Conway requested a six-month extension to pay the "9/11 excise taxes." Conway notes that he is hopeful that restructuring will allow the taxes to be repaid. Nothing in his letter indicates that he is relying on advice of counsel to pay the taxes. In fact, Conway's declaration filed with this Court makes no effort to demonstrate reliance at all.
Therefore, the Court finds that Conway may not rely on the grounds of advice of counsel to excuse payment of the excise taxes. Although the issue was not fully raised prior to the Complaint, there is no summary judgment evidence to support such a defense. No declaration, no affidavit, no sworn statement, and no piece of evidence supports Conway's counsel's assertion in the brief. The Court finds that this conclusionary and disingenuous argument does not raise a material issue of fact sufficient to defeat summary judgment.
Moreover, National's bankruptcy does not affect Conway's status as a responsible person. In fact, it is unclear from the evidence submitted by Conway as to how the fact that National was in bankruptcy should excuse his liability. The records are sparse, and there are no motions for payment of these taxes or documents indicating the steps taken to protect the Government's right to payment. The question is whether the post-bankruptcy funds received were "encumbered," as that term has been defined in this Circuit. Raba v. U.S., 977 F.2d 941 (5th Cir. 1992).
The issue boils down to this — whether the fact that National was in bankruptcy created an encumbrance on the funds which excuses Conway's payment of certain funds for salaries and other operating expenses. The burden of proof is on Conway to show encumbrance. See Barnett v. IRS, 988 F.2d 1449 (5th Cir. 1993).
While he makes the argument, Conway has not submitted any evidence that he was prevented from making payments to the IRS. There are no bankruptcy orders or findings preventing payment. In fact, the Government argues that, under the Local Bankruptcy Rules, he was authorized to pay excise taxes. Finding no evidence that he was told not to pay by any credible or competent counsel and that he took no steps to obtain bankruptcy approval or clarification, the Court finds that Conway has not met his burden on this issue.
Any individual who is a responsible person for all quarters who is found to have acted willfully for at least one quarter is, as a matter of law, willful for all quarters for which he is a responsible person. Thus, if the Court believes that Conway really did not know about the unpaid excise taxes for the third quarter of 2000 until the company filed bankruptcy, he is still willful for that quarter. This very issue has been ruled on several times by the Fifth Circuit.
In Mazo v. United States, 591 F.2d 1151 (5th Cir. 1979), several corporate officers, who were all found to be responsible persons, did not learn of the unpaid taxes until October 6, 1969. The unpaid taxes were for the first three quarters of 1969, which ended on March 31, 1969, June 30 1969, and September 30, 1969. None of the officers knew of the unpaid taxes while they were accruing. Each of these officers (other than Mr. Sadler) signed a check to a creditor other than the IRS after October 6, 1969. The Mazo court held each of the officers, including Mr. Sadler, to be willful for each of the quarters for which they were responsible persons, in other words, the first three quarters of 1969. In doing so, the Court stated:
In the case of individuals who are responsible persons both before and after withholding tax liability accrues, as the appellants were in this case, there is a duty to use unencumbered funds acquired after the withholding obligation becomes payable to satisfy that obligation; failure to do so when there is knowledge of the liability, as was the case here, constitutes willfulness.Id. at 1157.
The court in Logal v. United States, 1998 WL 6811477 (E.D. Tex. 1998), granted the United States' motion for judgment as a matter of law after being presented with the above argument. The jury in Logal had found Mr. Logal to be a responsible person for each quarter at issue, but willful for only the last quarter. The court agreed with the United States that Mr. Logal's willfulness related back to the earlier quarters as a matter of law, and the court's opinion was affirmed in Logal v. United States, 195 F.3d 229 (5th Cir. 1999).
Thus, all that is required for a finding that Conway acted willfully is to show that he voluntarily, consciously, and intentionally preferred any other creditor over the United States. No evil motive is required. As one circuit has noted:
To some willfulness sounds like a word which contains a suggestion of moral evil. It does not.Buffalow v. United States, 109 F.3d 570, 573 (9th Cir. 1997).
As stated above, the Court finds that there is no evidence that Congress intended to excuse National's payment of excise taxes. On September 22, 2001, Congress passed and the President signed into law, the Air Transportation Safety and System Stabilization Act. Pub.L. 107-42, 115 Stat. 236 ("the Act"). Section 301 of the Act allowed airlines to delay payment of any excise taxes due between September 10, 2001 and November 15, 2001 to November 15, 2001. Congress specifically granted the authority to the IRS to extend this due date until January 15, 2002, at its sole discretion. Section 301 of the Act states:
(a) Extension of due date for excise tax deposits. —
(1) In general. — In the case of an eligible air carrier, any airline-related deposit required under section 6302 of the Internal Revenue Code of 1986 to be made after September 10, 2001, and before November 15, 2001, shall be treated for purposes of such Code as timely made if such deposit is made on or before November 15, 2001. If the Secretary of the Treasury so prescribes, the preceding sentence shall be applied by substituting for `November 15, 2001' each place it appears —
(A) `January 15, 2002'
In IRS Notice 2001-77, 2001-2 C.B. 576, the IRS extended the due date until January 15, 2002:
[A]ny deposit of air transportation excise taxes required to be made by an eligible air carrier after September 10, 2001, and before January 15, 2002 shall be treated for purposes of the Code as timely made if the deposit is made on or before January 15, 2002 . . . Consequently, the time for paying the air transportation excise taxes shown or required to be shown on the return also will be deferred. Under § 6151 of the Code, an eligible air carrier will be required to pay such taxes for the third quarter of 2001 by January 15, 2002.2001 WL 1421850 (emphasis added).
There was no confusion as to what the new law meant, e.g. it allowed airlines extra time to pay certain excise tax deposits. Nowhere in the law, or anywhere else, is it even intimated that this deferral is tantamount to outright forgiveness of tax liability. Therefore, when National failed to make the deferred payments on January 15, 2002, the Act no longer provided it with an extension to make further payments. That this is the case is made obvious by the fact that Conway wrote the IRS on January 15, 2002, requesting an extension of time to pay the taxes. The Court finds that this evidence supports the United States' argument that he knew that the taxes had not been forgiven and that the time for deferrals had passed.
Contrary to Conway's arguments, the Court finds that the assessments were timely made. The attached Form 4340s are presumptive proof of valid assessments, and Conway bears the burden of producing evidence to the contrary. United States v. McCallum, 970 F.2d 66, 71 (5th Cir. 1992). Several other circuit courts have reached the same conclusion. See e.g., Conway v. United States, 326 F.3d 1268 (Fed. Cir. 2003); Hughes v. United States, 953 F.2d 531 (9th Cir. 1992); Fidelity Bank v. United States, 616 F.2d 1181 (10th Cir. 1980).
The Fifth Circuit in Perez v. United States, 312 F.3d 191 (5th Cir. 2002), held as follows concerning Forms 4340:
We held over a decade ago that, under the Federal Rules of Evidence, IRS Form 4340 constitutes valid evidence of a taxpayer's assessed liabilities and the IRS's notice thereof. . . . Against this solid evidence, Perez offered the district court only unsubstantiated, self-serving allegations that he did not receive notice of his assessed federal tax liabilities. And, his legal argument that IRS Forms 4340 and 4549 are not valid evidence of assessment and notice is totally specious. . . . The district court properly granted summary judgment to the government on the issues of whether Perez's taxes were properly assessed and whether Perez was properly notified of these assessments.Id. at 195-96. The fact that the Forms 4340 incorrectly list the assessments as jeopardy assessments, when they were actually quick assessments, does not benefit Conway. The IRS's use of "quick assessments," a standard procedure under IRS regulations, was permissible. See e.g., Dallin ex rel. Estate of Young v. United States, 62 Fed. Cl. 589, 601-12 (2004) (finding that mislabeling of assessments as jeopardy assessment, rather than a quick assessment, did not render it invalid, where it was clear on the face of the documents that an assessment was made, and amount of the tax and identification of the responsible person was correct); Republic Petroleum Corp. v. United States, 613 F.2d 518, 525 (5th Cir. 1980) (affirming district court judgment in part where underlying assessments were "quick assessments").
"Quick assessments" are assessments made in certain delineated circumstances, including where the period of limitations on assessment will expire within 60 days, such as this case where the IRS only has thirty days to assess Conway after his administrative appeal was denied. 26 U.S.C. § 6672(b)(3)(B). The term is merely administrative shorthand used by the IRS to denote those situations. See generally Koss v. United States, 81 A.F.T.R.2d (RIA) 2049 (E.D. Pa. 1998); 1 Audit, Internal Revenue Manual (CCH), § 4.4.25 at 8477.
There is no precedent for Conway's suggestion that listing the assessment as a "jeopardy assessment" instead of a "quick assessment" jeopardizes the validity of the assessment. Indeed, the Fifth Circuit has presided over many tax cases where the IRS has made a quick assessment, and it has never suggested that the use of that method was improper. See generally United States v. McCallum, 970 F.2d 66 (5th Cir. 1995); Cocchiara v. United States, 779 F.2d 1108 (5th Cir. 1986); Schupp v. United States, 71 A.F.T.R.2d (RIA) 917 (E.D. Tex. 1993), aff'd without opinion, 58 F.3d 636 (5th Cir. 1995).
Usually, the Forms 4340 are all that courts require to establish a valid assessment. Conway has failed to show how the assessments were invalid. Conway's brief speculates on what may have happened, but the evidence before the Court sufficiently establishes that the Government made a valid assessment, and Conway offers no evidence to rebut this. Included in the summary judgment record, as Exhibit 29, is the Affidavit of Sandy Mikkelsen. Attached to Ms. Mikkelsen's Affidavit is the Form 23C (RACS 006), which shows the total amount of assessments made in the Ogden Service Center on the day Conway was assessed, March 28, 2006. The document locator number (DLN) on page 3 of the RAC 006 is the same document locator number listed on the Form 4340s and every other document that shows the date of the assessments.
Conway also contends that the IRS failed to mail him notice and demand within 60 days of the assessments against him in violation of 26 U.S.C. § 6303(a). Even if he is correct, the Fifth Circuit has clearly held that such failure would only prevent the IRS from proceeding against him administratively. United States v. McCallum, 970 F.2d 66, 69 (5th Cir. 1992). The district court in United States v. McMahan, 2008 WL 5114651 (S.D. Tex. 2008), recently held:
However, section 6303(a) is only "designed to protect taxpayers from the summary administrative powers of the IRS. Such protection is unnecessary when the government initiates a civil proceeding because the complaint gives the taxpayer notice that the government is proceeding against his property." United States v. McCallum, 970 F.2d 66, 69 (5th Cir. 1992). A failure to send the appropriate notices and demands, even if presumed, does not prevent the Government from bringing a civil action like the one before the Court.Id. See also Holder v. U.S., 1999 WL 172271 *2 (N.D. Tex. 1999). The Court finds and is cited to no law that the Fifth Circuit's holding in McCallum has changed. Whether the Government's attempt to collect is by filing a civil suit or filing a counterclaim is of no consequence to the McCallum analysis.
Conway also argues that taxes unpaid by National during its bankruptcy cannot lead to Section 6672 liability for anyone employed by National. As support for this argument, he cites In re Major Dynamics, Inc., 897 F.2d 433 (9th Cir. 1990), a case in which the United States was not even a party. The Supreme Court effectively overruled Major Dynamics when it decided Begier v. United States, 496 U.S. 53 (1990). And, in In re Prescription Home Health Care, Inc., 316 F.3d 542 (5th Cir. 2002), the Fifth Circuit held that a bankruptcy court does not have jurisdiction to prevent the IRS from asserting a Section 6672 penalty against a non-debtor, such as Conway here. In addition, 26 U.S.C. § 6658(b) specifically allows for these assessments to be made against Conway. The argument of Conway to the contrary has no legal support and must therefore be rejected.
In In re Matter of Taylor, 132 F.3d 256 (5th Cir. 1998), the Fifth Circuit reversed both the bankruptcy and district courts and held that the IRS could proceed under Section 6672 against an individual debtor after his own Chapter 11 bankruptcy plan was confirmed. In Taylor, the IRS had filed a proof of claim for income taxes, but not for the Section 6672 penalties. Nevertheless, the Fifth Circuit held that the IRS could still proceed against Taylor for pre-petition Section 6672 penalties that were not assessed until after Mr. Taylor was out of bankruptcy. Therefore, in light of this clear precedent, the Court finds that National's bankruptcy has absolutely no impact on the decision of whether Conway is liable pursuant to Section 6672.
Conway also argues that the United States should be estopped from proceeding against him for the Section 6672 penalties, since the United States may have guaranteed loans for other airlines. There is no allegation or proof that the Government made any misrepresentations to Conway concerning his liability for excise taxes. Conway's main complaint is that the Government favored other airlines in assistance packages to the detriment of National. At best, National could assert this argument, but the Court fails to see how this absolves Conway of Section 6672 liability. In the Fifth Circuit:
In order to establish estoppel against the government in this circuit, a party must prove affirmative misconduct by the government as well as the four traditional elements of estoppel. The traditional elements of estoppel are (1) that the party to be estopped was aware of the facts, and (2) intended his act or omission to be acted upon, (3) that the party asserting estoppel did not have knowledge of the facts, and (4) reasonably relied on the conduct of the other to his substantial injury.In re Matter of Taylor, 132 F.3d at 263 (internal citations and quotations omitted). Based on this precedent, the Court finds that estoppel does not apply.
The Court is not unsympathetic to Conway's plight. What transpired on his watch was the "Perfect Storm." Yet, the warning signals for National loomed far in advance of the events of 9/11. Faced with competition, a drastic decrease in passenger revenue, postponement of taxes, and the lack of ability to secure sufficient funding foreshadowed the inevitable. Yet, as the Government points out, Conway and National continued to pay other creditors, even himself, despite the looming prospect of unpaid excise taxes of which Conway was well aware and hopeful might be paid at some date.
Therefore, as set forth fully above, the Court finds that the United States of America's Motion for Summary Judgment (Dkt. 67) should be GRANTED. In so finding, the Court specifically finds that Plaintiff Michael J. Conway was a responsible person of National Airlines, Inc. for the third quarter of 2000, the third quarter of 2001, and the fourth quarter of 2001, that Plaintiff Michael J. Conway acted willfully in failing to pay the excise taxes of National Airlines, Inc. for the third quarter of 2000, the third quarter of 2001, and the fourth quarter of 2001, that Michael J. Conway is indebted to the United States for $8,449,358.93, and that the United States should recover its applicable interest and costs.
Within fourteen (14) days after service of the magistrate judge's report, any party may serve and file written objections to the findings and recommendations of the magistrate judge. 28 U.S.C.A. § 636(b)(1)(C).
Failure to timely file written objections to the proposed findings and recommendations contained in this report shall bar an aggrieved party from de novo review by the district court of the proposed findings and recommendations and from appellate review of factual findings accepted or adopted by the district court except on grounds of plain error or manifest injustice. Thomas v. Arn, 474 U.S. 140, 148 (1985); Rodriguez v. Bowen, 857 F.2d 275, 276-77 (5th Cir. 1988).