Appeal from the United States District Court for the Central District of California. D.C. No. CV-88-6483-IH. Irving Hill, District Judge, Presiding.
Before: Procter Hug, Jr., Warren J. Ferguson, and Diarmuid F. O'Scannlain, Circuit Judges. Opinion by Judge O'Scannlain.
O'SCANNLAIN, Circuit Judge:
We must decide whether a corporate president may be held personally liable for his corporation's failure to pay over federal withholding taxes to the Internal Revenue Service when he had delegated responsibility for all financial matters to his chief financial officer.
Joseph Purcell ("Purcell") was president and sole shareholder of Purcell Temporaries, Incorporated (the "Company"). From the time he founded the Company in 1978 until February 1980, Purcell also served as its chief financial officer ("CFO"). At that point, however, Purcell decided to devote more of his energies to sales and promotional activities, and so hired one Lester Hatchard ("Hatchard") as CFO. This was not a good decision. Hatchard embezzled over $450,000 from the Company during his tenure, using a signature stamp bearing Purcell's signature to issue Company checks payable to himself. Eventually, Purcell learned that Hatchard had a prior criminal record; confronted with this discovery, Hatchard resigned his position in July 1981.*fn1
After Hatchard left the Company, Purcell reassumed control over its financial affairs. He quickly discovered that, contrary to what he had been led to believe, the Company was in terrible financial shape, with a negative net worth, and a substantial net bank overdraft. He also learned that Hatchard had failed to file federal employment tax returns for the first two quarters of 1981 (the "Hatchard Period"), and that the withheld taxes had not been paid over to the Internal Revenue Service ("IRS").
There followed a number of meetings between Purcell and the IRS regarding the Company's tax situation. Precisely what transpired in these meetings is unclear. Purcell alleges that he was led to believe that if he were to continue to operate the Company, paying its current tax liabilities and beginning the process of paying off the Hatchard Period liabilities, the IRS would not seek to hold him personally liable for the delinquent taxes. In any event, returns were filed and withholding taxes duly paid over by the Company in each of the last two quarters of 1981 and the first quarter of 1982. During the second and third quarters of 1982 (the "post-Hatchard Period"), returns were properly filed, but not all the withheld taxes were paid over. In 1983, the Company filed for bankruptcy protection.
On March 27, 1985, the IRS assessed Purcell in the amount of the unpaid withholding taxes for 1981 and 1982. Purcell eventually brought this suit in federal district court, seeking refund of certain amounts transferred to the IRS in partial satisfaction of those liabilities, as well as other relief. The United States filed a counterclaim seeking judgment for the balance of the assessment.
In January 1991, a three-day jury trial was held. At the close of the evidence both sides made motions for directed verdicts. A series of hearings was held over several days, after which the government's motion was granted, and Purcell's denied. Purcell appeals.
The Internal Revenue Code requires that certain employers withhold federal income and social security taxes from the wages of their employees. 26 U.S.C. §§ 3102(a), 3402(a). Withholding occurs each pay period, and payment is made to the government on a quarterly basis. Prior to the time they are paid over, the withheld taxes constitute a special fund held by the employer in trust for the government. 26 U.S.C. § 7501(a).
Section 6672*fn2 represents one of the means available to the government to ensure that these withheld taxes are collected and paid over. In relevant part it provides that "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 . . . shall . . . be liable to a penalty equal to the total amount of the tax
Purcell defends himself on both of the grounds suggested above: first, he argues that he was not a responsible person during the Hatchard Period; second, he argues that he did not willfully fail to pay over taxes withheld during that period.*fn3
It is undisputed that Purcell delegated full authority for handling the Company's finances to Hatchard, and that for so long as Hatchard remained with the Company Purcell took no active part in financial matters. Purcell argues that he was therefore not a "responsible person" during Hatchard's tenure as CFO and thus cannot be liable under section 6672 for the employment taxes that went unpaid during that period.
This circuit has consistently held that the "persons" who are "responsible" for the payment of withholding taxes are those who "had the final word as to what bills should or should not be paid, and when." Wilson v. United States, 250 F.2d 312, 316 (9th Cir. 1958). We acknowledge, however, that this provides no clear answer to the questions raised by Purcell. We must decide, then, whether Purcell can fairly be said to have "had the final word" as to the payment of creditors during the period in which he delegated his authority to Hatchard and exercised no control over the Company's day-to-day financial decision making.
We note that in recent years other courts have uniformly and repeatedly rejected the delegation theory pressed upon us by Purcell. All courts agree, as we ourselves have said, that "responsibility is a matter of status, duty, and authority." Davis, 961 F.2d at 873 (citations omitted). Authority turns on the scope and nature of an individual's power to determine how the corporation conducts its financial affairs; the duty to ensure that withheld employment taxes are paid over flows from the authority that enables one to do so. See Raba v. United States, 977 F.2d 941, 943 (5th Cir. 1992) ("The crucial examination is whether a person had the 'effective power to pay taxes.'") (citation omitted); Bowlen v. United States, 956 F.2d 723, 728 (7th Cir. 1992) ("the key to liability under section 6672 is the power to control the decision-making process by which the employer corporation allocates funds"); O'Connor v. United States, 956 F.2d 48, 51 (4th Cir. 1992) (whether person is responsible "is considered in light of the person's authority over an enterprise's finances or general decision making").
That an individual's day-to-day function in a given enterprise is unconnected to financial decision making or tax matters is irrelevant where that individual has the authority to pay or to order the payment of delinquent taxes. See Denbo v. United States, 988 F.2d 1029, 1033 (10th Cir. 1993) (although "it was Allred . . . who controlled the day-to-day operations of the corporation and made decisions concerning the payment of creditors and disbursement of funds," Denbo remained responsible because "his financial involvement in the corporation, along with his check-signing authority, gave him the effective power to see to it that the taxes were paid"); Bowlen, 956 F.2d at 728 (even after "Briggs took over the day-to-day operations of" the corporation, "the Bowlens remained responsible persons" because "they held sufficient control . . . to ensure that other creditors were not preferred while the back taxes remained unpaid"); McDermitt v. United States, 954 F.2d 1245, 1251 (6th Cir. 1992) ("although not an officer of the corporation, plaintiff was" responsible because "he had the power and the authority to direct the payment and non-payment of the corporation's liabilities").
It follows that "delegation will not relieve one of responsibility; liability attaches to all those under the duty set forth in the statute." Thomsen v. United States, 887 F.2d 12, 17 (1st Cir. 1989). See Bowlen, 956 F.2d at 728 ("delegation of the duty to turn over the taxes does not relieve a responsible person from liability"); see also Brounstein v. United States, 979 F.2d 952, 955 (3d Cir. 1992) ("Instructions from a superior not to pay taxes do not . . . take a person otherwise responsible under section 6672(a) out of that category."); Thibodeau v. United States, 828 F.2d 1499, ...