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Conway v U.S.

Case No. 10-40485 (C.A. 5, Jul. 19, 2011)

Michael Conway (“Conway”) appeals from the district court’s summary judgment determination that, pursuant to 26 U.S.C. § 6672, he is personally liable for excise taxes that National Airlines (“National”) collected from its passengers but failed to pay over to the United States during his tenure as National’s CEO. Because we hold that the district court properly found that Conway was a “responsible person” and that his failure to pay taxes was willful, as defined by this circuit’s precedents, we AFFIRM the judgment of the district court.

I. Background



Conway founded National in April 1995. From National’s inception until its Chapter 7 bankruptcy in May 2003, Conway served as National’s CEO, president, and chairman of the board. As an airline, National was required to collect a transportation excise tax from its passengers and pay over the collected taxes to the Government at regular intervals. See 26 U.S.C. § 4261. These taxes were assessed against and paid by National’s passengers; National held these taxes in trust for the Government. See Begier v. IRS, 496 U.S. 53, 55 (1990).

National struggled as a business and never reported a profit for an entire year. In the third quarter of 2000, Conway and the other directors of National began to discuss the possibility of declaring bankruptcy. On Thursday, November 30, 2000, National sent its quarterly excise tax return to the IRS with a check for $1,832,501.01 to pay those taxes. The IRS received and deposited the check on December 4, 2000. However, National filed for Chapter 11 bankruptcy on December 6, 2000, and, on the advice of counsel, closed its bank accounts to establish new accounts for reorganization. The accounts were closed before the check to the IRS had been debited, and payment to the IRS was refused. In the period immediately following the bankruptcy filing, National made no efforts to pay the excise taxes.

During bankruptcy, National regularly made bi-weekly payments of the excise taxes it collected in the ordinary course of business. However, the terrorist attacks of September 11, 2001, had a dramatic effect on the aviation industry. In response to that problem, Congress passed the Air Transportation Safety & System Stabilization Act, Pub. L. No. 107-42, 115 Stat. 230 (2001) (“Stabilization Act” or “Act”). One provision of the Act allowed airlines to defer paying over the collected excise taxes until November 15, 2001. 49 U.S.C. § 40101. Pursuant to authority granted under the Stabilization Act, the IRS extended the deferral to January 15, 2002. IRS Notice 2001-77, 2001-2 C.B. 576; 2001 IRB LEXIS 424. Many airlines also received direct infusions of money under the Stabilization Act, including National, which received approximately $21 million from the Government. On January 15, 2002, when the taxes for the third quarter of 2001 became due, National filed an excise tax return, but did not pay over the collected taxes, instead requesting a six-month extension for payment. Similarly, on January 30, 2002, National sent in a tax return for the fourth quarter of 2001 without payment.
 

 

Judge(s): Catharina Haynes
Jurisdiction: U.S. Court of Appeals, Fifth Circuit
Related Categories: Business Organizations , Civil Remedies , Taxation
 
Circuit Court Judge(s)
Emilio Graves
Catharina Haynes
Grady Jolly

 
Trial Court Judge(s)
Michael Schneider

 
Appellant Lawyer(s) Appellant Law Firm(s)
Laura Gavioli SNR Denton US LLP
Kenneth Pfaehler SNR Denton US LLP

 
Appellee Lawyer(s) Appellee Law Firm(s)
Ellen DelSole United States Department of Justice
Robert Metzler United States Department of Justice
Jennifer Rubin United States Department of Justice

 

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Click the maroon box above for a formatted PDF of the decision.
at 746. "[t]o further the basic purposes of section 6672, reasonable cause should that the district court did not err in finding that conway was a "responsible staff it, inc. v. united states, 482 f.3d 792, 797 (5th cir. 2007). summary account for, or pay over such taxes. see mazo v. united states, 591 f.2d 1151, 2 but the responsible persons are nevertheless liable for failure to collect the no. 10-40485 1968). as discussed above, it is sufficient that other creditors were consciously on december 6, 2000, and, on the advice of counsel, closed its bank accounts to passengers but failed to pay over to the united states during his tenure as as defined by this circuit's precedents, we affirm the judgment of the district the district court found that conway was liable for national's tax conceptually that a reasonable cause may militate against a finding of conway's argument that the stabilization act converted the post-petition taxes into5 granted the motion and entered judgment for the government in the amount of the undisputed record shows that conway was the founder, ceo, president, and $4,803,626.85. on june 2, 2006, conway made small payments towards the 19303, 1977 u.s. dist. lexis 13860, at *7-10 (w.d. la. sept. 22, 1977) (noting of the irs in the funds."). however, as the district court found, conway has continued to favor other creditors, as well as our precedents establishing the persons "in a position to perform all three of the enumerated duties with respect 8 . . . were `encumbered' falls on [the taxpayer.]"). in this circuit, funds are petition taxes because, at the time he left national, he believed he had arranged the taxes may not be remitted to the government." logal, 195 f.3d at 232. the largest individual stockholders; and he had the most individual authority, clerk approximately $430 million. check to the irs had been debited, and payment to the irs was refused. in the2 national's company accounts. no reasonable jury could find that conway was exceedingly limited nature of the "reliance on counsel as reasonable cause" 4. other arguments used for operational purposes. because the plain language of the statute is 1. the nature of reasonable cause conway's primary argument on appeal is that his failure to pay over the united states, 579 f.2d 938, 940 (5th cir. 1978) ("although the appellant may not always have 2003, national's bankruptcy was converted to chapter 7. between may 2001 conway also argues that his failure to pay over the taxes was not willful in the united states court of appeals otherwise lacked intent to avoid paying over the taxes. conway also argues that become the property of national, more than a mere statutory deferral of stabilization act justified national's post-petition failure to pay even past the no. 10-40485 chapter 11 proceedings, the bankruptcy court's local rules provided that "[d]ebtors operating against conway in the amounts of $148,325.00, $3,497,448.32, and initially or to collect funds to pay withholding taxes."); newsome v. united other creditors or that he should continue to pay creditors with funds then fourth quarter of 2001 without payment.3 deadline set by the act; (3) national lacked the unencumbered funds to pay the period immediately following the bankruptcy filing, national made no efforts to states of taxes." see gefen v. united states, 400 f.2d 476, 482 n.7 (5th cir. defense, we hold that conway has failed to put forward evidence of his reliance be premised upon use of withheld funds for other corporate purposes before the authorized national to use the withheld taxes as working capital. was a "responsible person," and (2) that the taxpayer willfully failed to collect, of the act which allowed for direct payments to the airlines, and under which national counsel told management what debts to pay, no evidence suggests that counsel 30, 2000, which was prior to national's december 6 bankruptcy. see mazo, 591 financially benefit the airlines. it is probable that these statements refer to other provisions 3. stabilization act in any manner to evade or defeat any such tax or the payment conway knew no later than january 19, 2001, when national filed a following of this advice, the checks sent to the irs were not paid (though there willfulness, no taxpayer has yet carried that pail up the hill."' (internal citation for the fifth circuit c. conway acted willfully that the withholding taxes were due, but who made a conscious decision to use 1. pre-petition (iii) manages the day-to-day operations of the business; (iv) has the payments to governmental entities on a timely basis, except where otherwise ordered for good cause' has been interpreted as advice by counsel under certain circumstances not willfulness. regarding national's pre-petition taxes, the only advice of counsel any person required to collect, truthfully account for, and pay over defendant appellee 40101. pursuant to authority granted under the stabilization act, the irs iii. conclusion national's bankruptcy counsel advised national to close its then current bank on the advice of counsel such as would establish reasonable cause under 6672. a. standard of review no. 10-40485 provided reasonable cause have been cases in which the advice of counsel tended to pay the withheld taxes as they became due, advice of non-collection by the responsible person directed payments to other creditors while knowing of the proceeds and accounts receivable deposited into the company's bank accounts conway argues that even if personal liability would normally attach under conway was a "responsible person" and that his failure to pay taxes was willful,1 f.2d at 736 ("the failure to remit taxes under section 6672(a) is not willful if the encumbered when "restrictions preclude a taxpayer from using the funds to pay for the foregoing reasons, we affirm the district court's summary conway has not raised a material fact issue supporting a finding that his disbursement of funds and payment of creditors; and (vi) possesses time in a reply brief are forfeited. see yohey v. collins, 985 f.2d 222, 225 (5th cir. 1993). that the taxpayer relied on the advice of counsel to structure bankruptcy estate those excise taxes were paid in the normal course of business. we conclude5 have a very limited application." newsome, 431 f.2d at 747 (internal citations see tidewater inc. v. united states, 565 f.3d 299, 303 (5th cir. 2009). furthermore,7 this court reviews the district court's grant of summary judgment de novo. judgment. plaintiff appellant ii. discussion the district court conflated national's tax liability with his personal liability for they became due and because he believed that payment for the taxes had of the taxes."). at a minimum, conway had the authority and duty to seek approval from the because national lacked the unencumbered funds to pay the excise taxes after because these taxes are collected from passengers, and were not intended to check on december 4, 2000. however, national filed for chapter 11 bankruptcy to put forward any evidence that national relied on counsel's advice so as to excise taxes from him personally. the government made quick assessments case: 10-40485 document: 00511543995 page: 5 date filed: 07/19/2011 excise taxes it collected in the ordinary course of business. however, the conway first claims that he was not a responsible person under 6672. national struggled as a business and never reported a profit for an entire government sent conway notice that it intended to seek to recover the unpaid specific attorney stating that excise taxes were simply not owed. industry. in response to that problem, congress passed the air transportation on november 6, 2002, national shut down all operations, and on may 7, corporate funds to pay other creditors" or "he recklessly disregards the risk that at the administrative hearings and thus whether the issue was waived under the variance this case. thus, in the absence of reasonable cause, conway's willfulness is michael conway ("conway") appeals from the district court's summary liability." (internal citations omitted)) with logal, 195 f.3d at 233 ("no no. 10-40485 in which the taxpayer's reliance on the advice of counsel was found to have creditors." barnett, 988 f.2d at 1457. where there is undisputed evidence that in the act demonstrates congressional intent to render payment of the excise timely filing of a tax return is not excused by the taxpayer's reliance on an agent, payment would be required to evince an intent to allow the collected taxes to be similarly, there is no evidence in the record that national's failure to pay applies to `any' responsible persons, not just to the person most responsible for the payment that an attorney's advice to execute a chattel mortgage in favor of the taxpayer's see bowen, 836 f.2d at 967 (stating that the taxpayers' use of the collected taxes any tax imposed by this title who willfully fails to collect such tax, to the tax dollars in question." slodov, 436 u.s. at 250. moreover, "[t]his circuit i. background appeal from the united states district court authority to hire or fire employees; (v) makes decisions as to the liable to a penalty equal to the total amount of the tax evaded, or v. these circumstances, the court should find that this case is extraordinary were assessed against and paid by national's passengers; national held these not collected, or not accounted for and paid over. bank did not provide reasonable cause where "the attorney did not advise [the takes a broad view of who is a responsible person under 6672." logal v. united establish willfulness."). however, evidence that the taxpayer acted with chairman of the board of national during the periods in question; he was one of the parties dispute whether national's reliance on counsel was properly presented6 person and that he willfully failed to account for or pay over the excise taxes for taxes was based on reliance on the advice of counsel, and thus he had reasonable reference to a few vague and conclusory statements of reliance in the record falls case: 10-40485 document: 00511543995 page: 3 date filed: 07/19/2011 case: 10-40485 document: 00511543995 page: 11 date filed: 07/19/2011 terms of the stabilization act, its effect was to allow airlines to defer paying over taxes; and (4) he believed that national had fully paid the excise taxes and creditors would get paid. conway was also authorized to sign checks on each of conway has the burden of raising a fact issue that would support a states, 431 f.2d 742, 745 (5th cir. 1970) ("[l]iability under section 6672 can also unambiguous, we need not examine the legislative history. similarly, nothing7 thereof, shall, in addition to other penalties provided by law, be a few sparse statements in the legislative history that the stabilization act was intended to under the stabilization act, including national, which received approximately an extension of time to pay over the taxes. national airlines made payments in the supreme court has clarified that a "responsible person" is not limited to tax liabilities). while conway may have had earnest intentions to pay back the circumstances. compare newsome, 431 f.2d at 748 n.12 ("the term `reasonable bankruptcy court for payment of the post-petition taxes, a step that he has not shown that he position in a company makes him responsible for the collection, accounting, or payment of case: 10-40485 document: 00511543995 page: 9 date filed: 07/19/2011 november 30, 2000, national sent its quarterly excise tax return to the irs with excise taxes in the amount of $11,572,151.91. on march 14, 2003, the 2001 irb lexis 424. many airlines also received direct infusions of money case: 10-40485 document: 00511543995 page: 8 date filed: 07/19/2011 payment. similarly, on january 30, 2002, national sent in a tax return for the president, and chairman of the board. as an airline, national was required to advice from counsel that no taxes were owed); anderson v. united states, no. granquist, 237 f.2d 390, 395 (9th cir. 1956) (noting that taxpayer relied upon willfully failed to pay over the taxes.8 court. b. conway was a responsible person4 no. 10-40485 attorney and tax collector, [and] advice by counsel that there was no tax furthermore, bankruptcy did not change conway's status as a responsible for other corporate expenses "made the united states `an unwilling joint ("stabilization act" or "act"). one provision of the act allowed airlines to defer july 19, 2011 no. 10-40485 the unpaid taxes for the third quarter of 2000 will hereinafter be referred to as the2 taxpayer] that he could prefer the bank over the united states without we disagree. nothing in the plain language of the act evinces an intent conclusion that the funds paid to other creditors were encumbered. see barnett, [reasonable cause] defense may be asserted by a responsible person who knew counterclaim for the amount owing followed by a motion for summary judgment at best for conway, the advice of counsel argument requires that the v. united states, 711 f.2d 729, 736 (5th cir. 1983) ("a considered decision not (8th cir. 1992) ("[f]unds are encumbered only where the taxpayer is legally bankruptcy schedule reflecting the unpaid taxes, that the pre-petition excise restoring actual cash diverted from the trust; it encompasses the duty to have barnett v. irs, 988 f.2d 1449, 1455 (5th cir. 1993). each of these factors weighs corporate funds to pay creditors other than the government."). however, cases liability under 6672 thus is composed of two elements: (1) that the taxpayer conway also argues that he did not act willfully in regard to the pre- accounts and open new ones as a debtor in possession. as a result of national's reasonable cause for purposes of 6672. see newsome, 431 f.2d at 747-48 ("[the even assuming arguendo that the payments did require approval of the bankruptcy court, this taxes, willfulness does not require an intent "to defraud or to deprive the united equivalent of advice that the taxes were not owed, and thus does not constitute support for his argument that the deferral of the payment of excise taxes rendered their and an abatement of the amounts owing. the government filed an answer and requirement alone would not strip conway of his responsible person status. see neckles v. excise taxes without needing approval of the bankruptcy court and concedes that taxes in trust for the government. see begier v. irs, 496 u.s. 53, 55 (1990). submitted no evidence that the funds paid to other creditors had a legal priority that during the bankruptcy, national continued to pay over the majority of its available . . . instead of paying the government."). therefore, conway has failed united states of america, failure to pay over the taxes. he argues that: (1) he relied on the advice of (1978). 7 haynes, circuit judge: reasonable cause can sometimes defeat a finding of willfulness. see howard, 711 before jolly, haynes, and graves, circuit judges. third quarter of 2001 became due, national filed an excise tax return, but did not collected taxes would threaten the continued existence of the business entity. case: 10-40485 document: 00511543995 page: 10 date filed: 07/19/2011 taxes had not been paid. as to the post-petition taxes, conway knew that they trust-fund taxes. see 26 u.s.c. 6672; slodov v. united states, 436 u.s. 238, 245-46 & n.7 cause shown." bankr. d. nev. r. 960, subsequently amended, bankr. d. nev. r. 1015 (2009). establish new accounts for reorganization. the accounts were closed before the obligation to make sure were collected, paid over and accounted for by november in light of the undisputed evidence that conway knew the taxes were due and conway founded national in april 1995. from national's inception until its chapter 7 bankruptcy in may 2003, conway served as national's ceo, advised that preferring other creditors would not subject national's officers to $21 million from the government. on january 15, 2002, when the taxes for the for the eastern district of texas and its november 6, 2002 shutdown, national had receipts and outlays of raising a fact issue on encumbrance. f i l e d 591 f.2d at 1154 ("[i]f a corporation has only sufficient cash to pay net wages, withholding taxes."). conway argues, however, that the stabilization act michael j. conway, case: 10-40485 document: 00511543995 page: 6 date filed: 07/19/2011 over the unpaid excise taxes. therefore, conway has not met his burden of for the first time in his reply brief, conway asserted many new arguments, including8 extended the deferral to january 15, 2002. irs notice 2001-77, 2001-2 c.b. 576; 3 to negate an element of willfulness under section 6672. see gray line co. v. during bankruptcy, national regularly made bi-weekly payments of the have reasonable cause for its failure to pay the pre-petition taxes. had the `final' say about paying creditors, in the apocalyptic sense of that word, he did have far short of pointing to specific substantive evidence that would support a subjecting himself to section 6672 liability"). nor is there evidence of any on conway's liability for the unpaid excise taxes under 6672. the district court liability with conway's personal liability is frivolous in light of the district far more than the approximately $8 million in unpaid excise taxes at issue in no. 10-40485 of justice and because it was fully briefed, we address the argument briefly. were we to consider the legislative history, it does not change our analysis. conway points to 11 states, 195 f.3d 229, 232 (5th cir. 1999). we have enumerated six factors to statute: case: 10-40485 document: 00511543995 page: 7 date filed: 07/19/2011 case: 10-40485 document: 00511543995 page: 1 date filed: 07/19/2011 collect a transportation excise tax from its passengers and pay over the collected its post-petition taxes was due to reliance on the advice of counsel. conway's doctrine. because we hold that conway has failed to establish a genuine issue of material fact the courts have adopted the phrase "responsible person" to signify a person whose1 amounts. the refund was denied. defense to personal liability under 6672. see mazo, 591 f.2d at 1157; see also both periods at issue. court's proper conclusion that conway was a responsible person and that he excise taxes for each of the deficient quarters and filed for a refund of those because of the september 11 terrorist attacks and the subsequent stabilization date for the corporation to pay over the funds."(emphasis added)). tax deficiency, willfulness is established as a matter of law. id.; see also howard liable for excise taxes that national airlines ("national") collected from its 10 pay over the collected taxes, instead requesting a six-month extension for reliance on counsel's advice provided reasonable cause so as to negate paying over the collected excise taxes until november 15, 2001. 49 u.s.c. responsible person actually and reasonably rely on advice that is actually given. had not been paid no later than january 15, 2002, when he signed a request for 5 businesses in cases under chapters 7, 11, or 13 shall pay all taxes, fees, and other required and such reliance is not `reasonable cause' for a late filing under 6651(a)(1)."). 9 ever pursued. see gustin, 876 f.2d at 492. personal liability for the excise taxes. see newsome, 431 f.2d at 748 (holding for those taxes to be paid. noting that corporate officers have a duty to ensure no. 10-40485 taxpayer's good faith belief that it would be able to obtain a loan to pay over the or truthfully account for and pay over such tax, or willfully attempts no. 10-40485 the trust fund taxes." id.; see also honey v. united states, 963 f.2d 1083, 1090 judgment determination that, pursuant to 26 u.s.c. 6672, he is personally conway raises several arguments to establish reasonable cause for his found in the record is chief financial officer ray nakano's statement that to fulfill one's obligation to pay the taxes owed, evidenced by payments made to $8,449,358.93 plus interest. conway timely appealed. the taxes. for the reasons discussed below, these arguments are not persuasive. finally, conway's argument that the district court conflated national's tax consider in determining whether someone is a responsible person under the preferred to the united states. id. case: 10-40485 document: 00511543995 page: 12 date filed: 07/19/2011 to prefer the government to other creditors). including the authority to hire and fire employees and to determine which taxes beyond the ordinary course of business. person with regard to the post-petition taxes. notably, conway acknowledges had been justified in using withheld taxes during december and january to pay terrorist attacks of september 11, 2001, had a dramatic effect on the aviation omitted)). received $21 million. counsel not to pay over the taxes, and thus had reasonable cause; (2) the when a responsible person becomes aware of tax liability, he has "a duty to act. generally, it is not a defense to liability under 6672 that payment of the lyle w. cayce omitted); see also logal, 195 f.3d at 233 ("`[a]lthough we have recognized not a responsible person before national's bankruptcy, so conway was a significant control over disbursements."); barnett, 988 f.2d at 1455 ("[section 6672] expressly to allow the airlines to use the excise taxes as working capital. by the plain that payment is made, we have repeatedly rejected the argument that a on january 29, 2003, the irs made a request for payment of the unpaid deficiency under 26 u.s.c. 6672(a), which provides: bowen, 836 f.2d at 968 (finding that a taxpayer acted willfully despite the hereinafter, national's unpaid excise taxes for the third and fourth quarters of 20013 employment tax liability and if that legal obligation is superior to the interest in favor of finding that conway was a responsible person for the taxes at issue. taxes to the government at regular intervals. see 26 u.s.c. 4261. these taxes as to his reliance on the advice of counsel, we do not reach the issue of variance. cf. united states v. boyle, 469 u.s. 241, 252 (1985) ("the failure to make a case: 10-40485 document: 00511543995 page: 2 date filed: 07/19/2011 the authority to sign company checks. taxpayer can produce a `reasonable cause' for this failure."); newsome, 431 f.2d year. in the third quarter of 2000, conway and the other directors of national conway appears to have conceded this issue during oral argument. in the interests4 taxpayer's good faith belief that payment for the taxes had been arranged is a other creditors in the knowledge that the taxes are due, is all that is required to the collected excise taxes until january 15, 2002, as authorized by the irs. no. 10-40485 a check for $1,832,501.01 to pay those taxes. the irs received and deposited the 2. during bankruptcy began to discuss the possibility of declaring bankruptcy. on thursday, 12 established as a matter of law, and summary judgment on the issue is proper. and does so, there may literally be no funds to constitute the corpus of the trust, something beyond "ordinary course" falls short on numerous levels. conway has provided no conway also disputes that his failure to pay over the taxes was willful. a 2. reliance on counsel6 national's ceo. because we hold that the district court properly found that 4 cause. the advice of counsel may constitute reasonable cause under some case: 10-40485 document: 00511543995 page: 4 date filed: 07/19/2011 obligated to use the funds for a purpose other than satisfying the preexisting successfully been arranged at the time that he left national. no. 10-40485 safety & system stabilization act, pub. l. no. 107-42, 115 stat. 230 (2001) excess of $220 million to creditors between february 2002 and november 2002, 6 988 f.2d at 1458 ("we next observe that the burden to prove that the loan whether such a person: (i) is an officer or member of the board of moving party is entitled to judgment as a matter of law. id. at 797-98. fifth circuit united states court of appeals 1153 (5th cir. 1979). on appeal, conway contests both that he was a responsible no. 10-40485 f.2d at 1154 ("[t]he liability of responsible persons generally is not limited to person" under 6672 for all periods at issue. responsible person acts willfully if "he knows the taxes are due but uses eventual payment outside the course of ordinary business. indeed, at the time of national's taxpayer] was not advised, nor did he interpret the advice as meaning, that he directors; (ii) owns a substantial amount of stock in the company; venturer in the corporate enterprise'" (internal citations omitted)); see also mazo, conway filed suit in district court seeking a refund of the amounts paid judgment is appropriate where there is no genuine issue of material fact and the "pre-petition taxes." are referred to as the "post-petition taxes." ensure that the taxes [are] paid before any payments [are] made to other pay the excise taxes. the irs's alleged failure to abide by its collection procedures. arguments raised for the first is no indication counsel knew of this consequence). such advice is not the responsible person with regard to the pre-petition taxes. thus, he had an conclusion that the taxes were not owed. while there is some evidence that


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