No. 94-2132 In the Supreme Court of the United States OCTOBER TERM, 1995 JOSEPH KELLER, PETITIONER v. UNITED STATES OF AMERICA AND LILLIAN HALSTEAD ON THE PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT BRIEF FOR THE UNITED STATES IN OPPOSITION DREW S. DAYS, III Solicitor General LORETTA C. ARGRETT Assistant Attorney General KENNETH L. GREEN ANTHONY T. SHEEHAN Attorneys Department of Justice Washington,D.C. 20530 (202)514-2217 ---------------------------------------- Page Break ---------------------------------------- QUESTION PRESENTED Whether petitioner was responsible for remitting payroll taxes and willfully failed to do so and is therefore liable for the amount of those taxes under 26 U.S.C. 6672. (I) ---------------------------------------- Page Break ---------------------------------------- TABLE OF CONTENTS Page Opinions below . . . . 1 Jurisdiction . . . . 1 Statement . . . . 2 Argument . . . . 4 Conclusion . . . . 9 TABLE OF AUTHORITIES Cases: Bowlen v. United States, 956 F.2d 723(7th Cir. 1992) . . . . 5 Davis v. United States, 961 F.2d 867(9th Cir. 1992), cert. denied, 113 S. Ct. 969 (1993) . . . . 8 Denbo v. United States, 988 F.2d 1029(10th Cir. 1993) . . . . 6 Donald D. Derickson, In re, 104 B.R. 346 (Bank. D. Or. 1989) . . . . 7 Fiataruolo v. United States, 8F.3d 930(2d Cir. 1993) . . . . 5 Garsky v. United States, 600 F.2d 86(7th Cir. 1979) . . . . 8 George v. United States, 819 F.2d 1008(11th Cir. 1987) . . . . 5 Godfrey v. United States, 748 F.2d 1568 (Fed. Cir. 1984) . . . . 6, 7 Greenberg v. United States, 46 F.3d 239 (3d Cir. 1994) . . . . 5 Honey v. United States, 963 F.2d 1083 (8th Cir.), cert. denied, 113 S. Ct. 676 (1992) . . . . 6, 8 Kenagy v. United States, 942 F.2d 469 (8th Cir. 1991) . . . . 5 Kinnie v. United States, 994 F.2d 279 (6th Cir. 1993) . . . . 5, 8 Mazo v. United States, 591 F.2d 1151 (5th Cir.), cert. denied, 444 U.S. 842 (1979) . . . . 6 Muck v. United States, 3 F.3d 1378 (10th Cir. 1993) . . . . 5, 8 Purcell v. United States, 1 F.3d 932 (9th Cir. 1993) . . . . 5 Rogers v. Lodge, 458 U.S. 613 (1982) . . . . 6 Simpson v. United States, 664 F. Supp. 43 (E.D.N.Y. 1987) . . . . 7 Slodov v. United States, 436 U.S. 238 (1978) . . . . 7 Smith v. United States, 894 F.2d 1549 (11th Cir. 1990) . . . . 6 Thomsen v. United States, 887 F.2d 12 (1st Cir. 1989) . . . .5, 6 (III) ---------------------------------------- Page Break ---------------------------------------- IV Cases-Continued: Page Tiffany Fine Arts, Inc . v. United States, 469 U.S. 310 (1985) . . . . 6 Turnbull v. United States, 929 F.2d 173 (5th Cir. 1991) . . . . 5 United States v. Rem, 38 F.3d 634 (2d Cir. 1994) . . . . 6, 8 United States v. Vespe, 868 F.2d 1328 (3d Cir. 1989) . . . . 6, 8 Wood v. United States, 808 F.2d 411 (5th Cir. 1987) . . . . 6, 8 Wright v. United States, 809 F.2d 425 (7th Cir. 1987) . . . . 6 Statutes and regulations: Internal Revenue Code of 1954 (26 U.S.C.): 6672 . . . . 3, 5 6672(a) . . . . 4, N.D. Cent. Code 3330.1-18-01 to 30.1-18-21 (1976 & Supp. 1993) . . . . 5-6 ---------------------------------------- Page Break ---------------------------------------- In the Supreme Court of the United States OCTOBER TERM, 1995 No. 94-2132 JOSEPH KELLER, PETITIONER v. UNITED STATES OF AMERICA AND LILLIAN HALSTEAD ON PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE EIGHTH CIRCUIT BRIEF FOR THE UNITED STATES IN OPPOSITION OPINIONS BELOW The opinion of the court of appeals (Pet. App. A1- A13) is reported at 46 F.3d 851. The opinion of the district court (Pet. App. B1-B18) is unreported. JURISDICTION The judgment of the court of appeals was entered on February 2,1995. The petition for rehearing was denied on March 30, 1995. The petition for a writ of certiorari was filed on June 28, 1995. The jurisdiction of this Court is invoked under 28 U.S.C. 1254(1). (1) ---------------------------------------- Page Break ---------------------------------------- 2 STATEMENT 1. Petitioner first became involved in the operation of the Sleepy Hollow Inn as the personal representa- tive of the estate of his brother, who died in 1982 (Pet. App. A2, B3). His brother had owned the Inn, and his will directed the personal representative of his estate to operate the Inn until it was sold (id. at A2, B3). The Inn was sold in 1982 but ownership reverted to the estate when the purchasers defaulted on the sale contract in 1985 (id. at A2, B3). Petitioner then agreed to allow the heirs to operate the Inn (id. at A2- A3, B3) and hired Lillian Halstead as the Inn's man- ager (id. at A3, B3). She worked at the Inn until it was closed in June 1988 (id. at A3-A4, B4-B5). An outside service handled the payroll for the Inn for the first two quarters of 1986 (id. at A3, B4). Beginning in the third quarter of 1986, Halstead and one of the heirs assumed that task (id. at A3-A4, B4). In October 1987, petitioner learned that the income and social security taxes that had been withheld from the wages of the Inn's employees for the third and fourth quarters of 1986 had not been paid over to the government (Pet. App. A4, B5). Petitioner fried re- turns for those, quarters and made payments towards the amounts due. Although petitioner instructed Halstead to pay these taxes in the future, petitioner did not verify or ensure that the taxes were in fact being paid. The Inn thereafter continued to pay its other creditors, but the taxes that it withheld from its employees' wages were not paid to the government (ibid.). The Internal Revenue Service thereafter assessed petitioner for an amount equal to the taxes that had been withheld by the Inn and had not been paid over to ---------------------------------------- Page Break ---------------------------------------- 3 the government ($18,485.87) (Pet. App. A5, B2). The Service determined that petitioner was responsible for paying the taxes withheld by the Inn and that he willfully failed to do so (ibid.). 2. Petitioner paid part of the assessed amount and sued for a refund (Pet. App. A5, B 1). The United States counterclaimed for the remaining amount (id. at A5).1 The district court granted summary judg- ment to the government (Pet. App. B2, B17-B18). The court rejected petitioner's argument that he was not a "responsible" person within the meaning of 26 U.S.C. 6672 because he did not exercise day-today control over the operation of the Inn (Pet. App. B9- B10). The court concluded that petitioner had ulti- mate control over the operations of the Inn under state law and that the delegation of that responsibil- ity to the manager did not absolve him from liability (ibid.). The court also held that petitioner had willfully failed to pay the withheld taxes to the government because petitioner had recklessly disregarded a known risk that the taxes would not be paid (Pet. App. B12-B13). The court stated that, after petitioner learned of the Inn's initial tax problems, he could easily have verified whether the withheld taxes were being paid, but failed to do so (id. at B13-B14). The court held that petitioner's knowledge of the man- ager's prior failures to pay withheld taxes to the ___________________(footnotes) 1 The Internal Revenue Service also assessed the unpaid taxes against Halstead under 26 U.S.C. 6672 (Pet. App. B2) and named Halstead as an additional defendant in its counterclaim. The district court granted the government's motion for sum- mary judgment with respect to Halstead (id. at A5, B14-B18). She did not appeal (id. at A5 n.2). ---------------------------------------- Page Break ---------------------------------------- 4 government made it unreasonable for him to rely on her without further factual verification (id. at B14). 3. The court of appeals affirmed (Pet. App. A1-A13), The court rejected petitioner's contention that he was not responsible for the payment of withheld taxes because he did not exercise day-to-day control over the Inn's operations (id. at A7-A9). The court noted that, under state law, petitioner had ultimate author- ity over the management of the estate and that petitioner had exercised that authority on occasions involving the payment of withheld taxes (ibid.). The court concluded that, although petitioner delegated day-to-day decisions to the manager, petitioner re- tained ultimate authority and responsibility for the operations of the Inn (id. at A9). The court also held that petitioner's failure to pay the withheld taxes to the government was willful (Pet. App. A10-A13). The court stated that, even if petitioner lacked actual knowledge that the taxes were not being paid, petitioner's conduct amounted to reckless disregard of his responsibilities (id. at A11- A12). The court noted that, after the manager had proved herself to be unreliable, petitioner continued to delegate authority to her and relied on her oral assurances without taking appropriate steps to verify that the taxes were in fact being paid (ibid.). ARGUMENT The decision of the court of appeals is correct and does not conflict with any decision of this Court or any other court of appeals. Further review is there- fore not warranted. 1. Under Section 6672(a) of the Internal Revenue Code, when a person who is responsible "to collect, truthfully account for, and pay over" withholding ---------------------------------------- Page Break ---------------------------------------- 5 taxes "willfully" fails to do so, he is liable for a "pen- alty" equal to the amount of the unpaid taxes. 26 U.S.C. 6672(a). As the court of appeals correctly rec- ognized (Pet. App. A7), an individual is "responsible" under Section 6672 if he has the status, duty, and authority to avoid a default in the collection or payment of the trust fund taxes. Responsibility requires only significant-not ex- clusive-authority over the business's financial de- cisions. More than one person may be responsible for paying withheld taxes, and a person who is respon- sible may not avoid liability by delegating that authority to others. See, e.g., Greenberg v. United States, 46 F.3d 239,242-243 (3d Cir. 1994); Fiataruolo v. United States, 8 F.3d 930, 938-939 (2d Cir. 1993); Muck v. United States, 3 F.3d 1378, 1381 (10th Cir. 1993); Purcell v. United States, 1 F.3d 932, 936-937 (9th Cir. 1993); Kinnie v. United States, 994 F.2d 279, 283-284 (6th Cir. 1993); Bowlen v. United States, 956 F.2d 723, 728 (7th Cir. 1992); Kenagy v. United States, 942 F.2d 459, 464-465 (8th Cir. 1991); Turnbull V. United States, 929 F.2d 173, 178 (5th Cir. 1991); Thomsen v. United States, 887 F.2d 12, 16-17 (1st Cir. 1989); George v. United States, 819 F.2d 1008, 1011- 1012 (11th Cir. 1987). The courts below correctly concluded that the facts of this case establish that petitioner had the requisite status, duty, and authority to be responsible for the payment of withheld taxes by the Inn. As the court of appeals observed (Pet. App. A8-A9), as personal representative of his brother's estate, petitioner had authority equivalent to that of an absolute owner of the assets of the estate, including the Inn. See N.D. Cent. Code 30.1-18-01 to 30.1-18-21 (1976 & Supp. ---------------------------------------- Page Break ---------------------------------------- 6 1993). If petitioner did not fully exercise his power over the day-to-day operations of the Inn, it was because of his conscious choice, not because of any inherent limitation on his authority (id. at A8-A9, B9- B11). The court of appeals also correctly held (Pet. App. A12) that the facts of this case establish that peti- tioner "willfully" failed to pay the withheld taxes to the government. A responsible person acts willfully when he proceeds without regard for a known or obvious risk that withheld taxes may not be paid. See, e.g., United States V. Rem, 38 F.3d 634, 642-643 (2d Cir. 1994); Denbo v. United States, 988 F.2d 1029, 1033-1034 (10th Cir. 1993); Honey v. United States, 963 F.2d 1083, 1087 (8th Cir.), cert. denied, 113 S. Ct. 676 (1992); Smith v. United States, 894 F.2d 1549, 1554 n.5 (11th Cir. 1990); Thomsen v. United States, 887 F.2d at 17-19; United States v. Vespe, 868 F.2d 1328, 1334-1335 (3d Cir. 1989); Wright v. United States, 809 F.2d 425, 427 (7th Cir. 1987); Wood v. United States, 808 F.2d 411, 415 (5th Cir. 1987); Mazo v. United States, 591 F.2d 1151,1154-1157 (5th Cir.), cert. denied, 444 U.S. 842 (1979). The courts below concluded that, in the face of a serious risk that withheld taxes would not be paid, petitioner failed to take reasonable actions to ensure their payment. That factual deter- mination is amply supported by the record. See Pet. App. A10-A12. Further review of the factual deter- minations "concurred in by two lower courts" is not warranted (Rogers v. Lodge, 458 U.S. 613, 623 (1982)). See Tiffany Fine Arts, Inc. v. United States, 469 U.S. 310,31'7-318 n.5 (1985). 2. Petitioner claims (Pet. 11-12) that the decision in this case conflicts with Godfrey v. United States, ---------------------------------------- Page Break ---------------------------------------- 7 748 F.2d 1568 (Fed. Cir. 1984). In that case, Godfrey was the chairman of the board of a publicly held corporation in which he owned an insignificant frac- tion of the voting stock. Id. at 1571 n.2, 1576. The court concluded that, while Godfrey was active in the affairs of the business "within the proper sphere of his] role as chairman of the board," there was no evidence that Godfrey "had or exercised control of the collection, accounting for, and payment over of taxes." Id. at 1576. By contrast, as both courts below em- phasized in this case (Pet. App. A8-A9, B9-B11), petitioner did have authority over the operations of the Inn and exercised that authority with respect to the payment of the Inn's taxes. The decisions in Godfrey and in the present case differ because the facts of the two cases differ, not because of any conflict in interpretation of Section 6672.2 3. Petitioner asserts (Pet. 16-19) that the decision in this case conflicts with Slodov v. United States, 436 U.S. 238 (1978). In Slodov, the Court addressed the liability of an individual who first became respon- sible for a corporation's withholding taxes after prior management (i) used the funds represented by those taxes to pay other creditors and (ii) left the cor- poration with no unencumbered funds to pay the taxes. The Court held that the newly responsible individual must use funds that subsequently come into the corporation's possession to satisfy the prior ___________________(footnotes) 2 The lower court decisions that petitioner cites (Pet. 13-14) are similarly based upon facts that differ meaningfully from the present case. See Simpson v. United States, 664 F. Supp. 43 (E.D.N.Y. 1987), In re Donald D. Derickson, 104 B.R. 346 (Bankr. D. Or. 1989). ---------------------------------------- Page Break ---------------------------------------- 8 tax delinquency only if the after-acquired funds are directly traceable to the unpaid taxes. Id. at 259-260. Unlike the situation in Slodov, petitioner was at all relevant times responsible for collecting and paying over the withheld taxes. He therefore had a continu- ing duty to apply all unencumbered funds received by the Inn to satisfy the withholding tax obligations. As the Seventh Circuit stated in Garsky v. United States, 600 F.2d 86,91 (1979): Slodov does not relieve a "responsible person" of the responsibility to reduce accrued withholding tax liability with funds acquired after the funds actually withheld have been dissipated so long as the person responsible has been so throughout the period the withholding tax liability accrued and thereafter. Other courts have consistently reached the same conclusion. See, e.g., United States v. Rem, 38 F.3d at 643; Muck v. United States, 3 F.3d at 1381-1382; Kinnie v. United States, 994 F.2d at 284-285; Honey v. United States, 963 F.2d at 1088-1089; Davis v. United States, 961 F.2d 867, 871-878 (9th Cir. 1992), cert. denied, 113 S. Ct. 969 (1993); United States v. Vespe, 868 F.2d at 1334-1335; Wood v. United States, 808 F.2d at 415-416. ---------------------------------------- Page Break ---------------------------------------- 9 CONCLUSION The petition for a writ of certiorari should be denied. Respectfully submitted. DREW S. DAYS, III solicitor General LORETTA C. ARGRETT Assistant Attorney General KENNETH L. GREENE ANTHONY T. SHEEHAN Attorneys AUGUST 1995