Unpublished Disposition, 940 F.2d 667 (9th Cir. 1991)

No. 90-55768.

United States Court of Appeals, Ninth Circuit.

Before REINHARDT and FERNANDEZ, Circuit Judges, and CROCKER, Senior District Judge^* .

MEMORANDUM^** 

Therese Fabozzi appeals the district court's judgment, following a bench trial, in favor of the Internal Revenue Service (IRS) in Fabozzi's action for refund of payroll taxes and FICA taxes withheld from Mediscan Inc. employees' wages under 26 U.S.C. §§ 3101(a), 3102, and 3402.

We affirm in part and reverse in part.

BACKGROUND

The IRS assessed a penalty against Fabozzi under 26 U.S.C. § 6672 for failing to collect, account for, and pay over federal withholding taxes that were due with respect to the wages of Mediscan's employees. Fabozzi paid part of the amount assessed against her and then filed a claim for refund of the penalty plus interest. When no action had been taken on that claim for over six months, Fabozzi filed suit in the district court seeking a refund for the amounts paid. The United States answered Fabozzi's complaint and asserted a counterclaim based on the remainder of the section 6672 assessments of penalties against Fabozzi. The district court found Fabozzi liable for all of the penalties assessed against her, denied her complaint for relief, and granted the United States' counterclaim.

Fabozzi began work for Mediscan in November of 1981 and terminated in November of 1983. While her title was bookkeeper and her pay was not high, the evidence indicated that she had considerably more authority than those circumstances would suggest. According to testimony credited by the trial judge, within a period of a few months she had even engineered the removal of the outside accounting firm and the president of the corporation. All of that was accomplished by the end of May of 1982. She handled the "accounting, personnel, administrative and payroll functions of the business," and assumed those functions even before May of 1982 and continuing until she left in November of 1983 at which time the company closed. The IRS assessed her with penalties for unpaid taxes for quarters commencing with the fourth quarter of 1981 and ending with the fourth quarter of 1983. At issue is whether, in light of the duties that Fabozzi performed and the responsibilities that she held at Mediscan, the district court properly concluded that Fabozzi was a person who was responsible for collecting, accounting for, and paying over federal taxes withheld from the earnings of Mediscan's employees within the meaning of section 6672 and whether she willfully refused to pay the IRS.

JURISDICTION AND STANDARD OF REVIEW

We have jurisdiction pursuant to 28 U.S.C. § 1291. The district court's finding that Fabozzi was "responsible" for purposes of being held liable for unpaid withholding taxes is on a question of fact and cannot be set aside unless clearly erroneous. Maggy v. United States, 560 F.2d 1372, 1375 (9th Cir. 1977), cert. denied, 439 U.S. 821, 99 S. Ct. 86, 58 L. Ed. 2d 112 (1978). The district court's finding of willfulness is a finding of fact subject to reversal only if clearly erroneous. Dudley v. United States, 428 F.2d 1196, 1200 (9th Cir. 1970). Under the clearly erroneous standard, the appellate court must accept the lower court's findings of fact unless upon review it is left with the definite and firm conviction that a mistake has been committed. Maggy, 560 F.2d at 1375.

DISCUSSION

To be liable for failure to pay over taxes under 26 U.S.C. § 6672, the party assessed must be a responsible person and must willfully refuse to pay the tax. Teel v. United States, 529 F.2d 903, 905 (9th Cir. 1976). A person is "responsible" if he has the final word on which bill should or should not be paid. Maggy, 560 F.2d at 1374. In this context, 'final' means significant rather than exclusive control. Dudley, 428 F.2d at 1201; Turner v. United States, 423 F.2d 448, 449 (9th Cir. 1970). One factor to consider is the person's control over the payment of bills. Dudley, 428 F.2d at 1202. Also, it is not necessary to be an officer or even an employee to be a responsible person within the meaning of section 6672 as long as the person is "responsible for controlling corporate disbursements." Pacific Nat'l Ins. Co. v. United States, 422 F.2d 26, 30-31 (9th Cir.), cert. denied, 398 U.S. 937, 90 S. Ct. 1838, 26 L. Ed. 2d 269 (1970).

The district court found:

Therese Fabozzi was not a mere bookkeeper vested with the titular title of controller. In fact the evidence showed that she was the chief financial officer who had the authority to make financial decisions for Mediscan. The evidence also showed that she preferred her own financial interests over her duty to insure that the monies provided by her employees were turned over to the IRS as per his direction.

The district court's findings are not clearly erroneous. The evidence presented supported the conclusion that Fabozzi was in control of the financial portion of the corporation from the time she started with the company.¹  Moreover, although Fabozzi argues that she did not have significant control over the disbursement of Mediscan's funds, the district court refused to believe her testimony. This court is "not at liberty to disturb the credibility determinations made by the ... district court." United States v. Kerr, 876 F.2d 1440, 1444 (9th Cir. 1989). Therefore, the district court did not err in determining that Fabozzi was a responsible person for collecting and paying taxes.

The failure to pay taxes must also be willful. A failure to pay withheld payroll taxes to the IRS is willful for section 6627 purposes if it is "voluntary, knowing and intentional even though it is not done with a bad purpose or an evil motive." Barnett v. United States, 594 F.2d 219, 222 (9th Cir. 1979). There must be either knowledge of nonpayment or reckless disregard of whether the payments were being made. Teel, 529 F.2d at 905. Conduct that is motivated by a reasonable cause may still be willful. Barnett, 594 F.2d at 221. Thus, a person who pays other creditors, rather than the IRS is liable for a willful failure to pay the taxes. Id. at 222. And, when a person pays other creditors rather than the government after the taxes are due, failure to pay the government is willful as a matter of law. Id. Finally, a mistaken belief by the responsible person that the tax need not or cannot be paid does not suffice to render the failure to pay non-willful. Teel, 529 F.2d at 906.

Here, Fabozzi knew that she had to pay the IRS the withheld payroll taxes. However, she did not. Instead, she used the money to pay creditors, to help Mediscan's employees purchase automobiles, and "to get the rent caught up." Those actions constitute willfulness as a matter of law. Sorenson v. United States, 521 F.2d 325, 327-28 (9th Cir. 1975).

Therefore, the district court did not, in general, err when it determined that Fabozzi, a responsible person, willfully failed to pay the taxes owed to the IRS. However, the determination as to one quarter of the tax period does not appear to be supported by the evidence. The testimony indicates that Mr. Watson had to make constant advances of cash to the corporation in order to enable it to meet its obligations. Thus, while it is true that Fabozzi can be held responsible for payroll taxes which accrued before she became a responsible person, that rule can only apply if there were sufficient liquid assets on hand at her accession to her position of responsibility. See Slodov v. United States, 436 U.S. 238, 259-60, 98 S. Ct. 1778, 1791, 56 L. Ed. 2d 251 (1978) (if funds not available for prior periods, no liability); Wilkinson v. United States, 3 Cl.Ct. 55, 60 (1983) (funds available, liability found). Given the testimony regarding the company's illiquidity, it therefore, appears that Fabozzi cannot be held responsible for taxes withheld for October 1981.

On remand, the district court should determine what portion of the amount for the fourth quarter of 1981 is ascribable to October 1981 and reduce the judgment against Fabozzi accordingly.

AFFIRMED in part, REVERSED in part and remanded for further proceedings not inconsistent with this disposition.