The Supreme Court has declined to review a decision of the Fifth Circuit that the president/CEO of a defunct airline was a responsible person who willfully failed to remit excise taxes. The Fifth Circuit rejected the taxpayer's claims that he relied on counsel in paying other creditors before IRS and that a post-9/11 law extending the date of payment excused payment altogether.
Background. Under Code Sec. 6672(a), if an employer fails to properly pay over certain taxes, including transportation excise taxes, IRS can seek to collect a trust fund recovery penalty equal to 100% of the unpaid taxes from a "responsible person," i.e., a person who: (1) is responsible for collecting, accounting for, and paying over payroll taxes; and (2) willfully fails to perform this responsibility. In determining whether there is "willfulness" for purposes of Code Sec. 6672(a), the courts have focused on whether a taxpayer had knowledge about the non-payment of the payroll taxes, or showed reckless disregard with respect to whether the payments were being made.
Facts. Michael Conway founded and operated National Airlines, Inc. (National), and was National's chief executive officer (CEO), president, and chairman of its board of directors during the tax periods at issue (quarters ending Sept. 30, 2000; Sept. 30, 2001; and Dec. 31, 2001). National began flying passengers in '99, but was under bankruptcy protection by December of 2000 and ceased operations at the end of 2001. When National stopped doing business, it had reported but failed to pay transportation excise taxes for the tax periods at issue of $1,832,501.01, $3,497,448.32, and $4,803,626.85, respectively.
Evidence showed that Conway knew of the unpaid excise taxes for the third quarter of 2000, at the latest, when National declared bankruptcy. Further, he knew of the unpaid taxes from 2001, at the latest, on Sept. 22, 2001, when Congress passed the Air Transportation Safety and System Stabilization Act (the Act) giving airlines a deferral of time within which to pay their excise taxes.
Conway was an authorized check signer on each of National's checking accounts, ran National's day-to-day operations, continued to receive his salary (the highest in the company) after knowing of the unpaid taxes, and personally paid, authorized, or acquiesced in the payment of millions of dollars to non-IRS creditors. Evidence further showed that he had the authority to determine which bills were paid. Conway admitted that the excise taxes collected by National weren't segregated into separate bank accounts.
In National's bankruptcy, IRS filed an administrative claim for over $11 million, most of which reflected the unpaid excise taxes from 2001. National never objected to the claim. The Chapter 7 trustee allowed IRS's claim in its entirety.
On or around Mar. 14, 2003, IRS notified Conway of its intent to assess trust fund recovery penalties against him, which he timely appealed on May 9. IRS rejected his appeal and made its assessments against Conway under Code Sec. 6672 on Mar. 28, 2006.
Conway argued that the Act converted the unpaid excise taxes from trust funds to short-term loans, effectively making the government a partner with the airlines, and that he didn't pay the excise taxes based on counsel's advice. He also argued that he wasn't a responsible person, and that he didn't act willfully.
District Court sides with IRS. The district court found that the facts clearly showed that Conway was liable as a matter of law-he was the chief individual responsible for the overall business of National, he was its CEO and president, he was an authorized check signer, and he could hire and fire employees-and rejected his argument that he relied on counsel as "conclusory and disingenuous." It further found that he acted willfully, as shown by evidence that he authorized payments to creditors other than IRS after learning of the unpaid taxes, and rejected his argument that National's bankruptcy created an encumbrance on the available funds that prevented him from making payments to IRS.
The court also considered, and ultimately rejected, his argument that the Act excused payment of the excise taxes, finding that there was no indication that Congress intended to do anything more than defer their payment. The Act and accompanying IRS guidance unambiguously provided for an extension of time to pay, and not forgiveness of, the excise taxes.
Appellate Court decision. The Court of Appeals for the Fifth Circuit affirmed the district court's decision, agreeing that Conway was a responsible person (both before and during National's bankruptcy) who willfully failed to pay taxes.
Conway argued that he had reasonable cause for his failure to pay taxes, based on (i) reliance on the advice of counsel, (ii) the Act, (iii) the lack of unencumbered funds to pay the taxes, and (iv) his belief that National had fully paid the excise taxes. However, the Fifth Circuit easily rejected his arguments. The only advice of counsel in the record was the CFO's advice that National close its current bank accounts and open new ones as a debtor in possession, which fell far short of establishing reasonable cause. The Act didn't, as Conway argued, authorize National to use the withheld taxes as working capital. Further, he failed to show that the funds paid to non-IRS creditors had legal priority over the unpaid excise taxes, and any good faith belief by Conway that the taxes would be paid was insufficient to defeat willfulness.
No further review. On Apr. 16, 2012, the Supreme Court refused to review the decision of the Fifth Circuit in Conway.