J. Larry Bradshaw, Plaintiff-Counterclaim v. United States of America, Defendant-Counterclaimant-Appellant , 83 F.3d 1175 ( 1996 )

ORDER ON REHEARING

April 18, 1996

On consideration of the petition for rehearing and the response, the court finds and concludes as follows:

In his petition Bradshaw asserts that “[t]he Court should have relied upon the 1986 Liquidation Agreement inasmuch as it is this agreement which controlled and dictated the relationship between Heritage and Zions Bank, during the period in which withheld employee taxes for the first, second and third quarters of 1986 were due and payable.” Petition for Rehearing at 15. He argues that this 1986 Liquidation Agreement superseded the May 1985 Agreements and that under this “controlling” Liquidation Agreement he is not a responsible person.

Fourth Quarter 1985 Penalty and First and Second Quarter 1986 Taxes

Because the Liquidation Agreement was not executed until August 6,1986, Bradshaw cannot rely on it as to any taxes or penalties accruing prior to that date. Therefore the Liquidation Agreement is irrelevant to Bradshaw’s failure to pay the fourth quarter 1985 penalty and first and second quarter 1986 taxes. Rather the May 1985 agreement was the operative agreement in place when those obligations accrued. However, as we explained in our opinion, Bradshaw cannot use the May 1985 agreement to excuse his failure to pay the taxes.¹

Third Quarter 1986 Taxes

As for the third quarter 1986 taxes, even assuming Bradshaw can rely on the August 6, 1986 Liquidation Agreement, he was still a responsible person under § 6672.

Bradshaw asserts that “Heritage could not remit withholding taxes due on employee wages for the first, second, and third quarters of 1986 because Heritage assets were completely controlled by Zions Bank, and Zions Bank would not release funds for payment of such taxes despite Zions Bank’s obligation to do so under the 1986 Liquidation Agreement and Bradshaw’s repeated requests.” Petition at 11 (emphasis added). The relevant paragraphs of the Liquidation Agreement provide as follows (the term “Borrowers” refers to Bradshaw, the various Heritage entities, and R. Lamar Bradshaw; “Zions” refers to the Bank).² Bradshaw asserts that the deletion of the last sentence of ¶ 12 (which had said “The individual Borrowers may have personal liability for such taxes”) “clearly illustrates the intent to remove the personal liability for the taxes from the individual borrowers and require payment of the taxes through the provisions stated in paragraphs 20 and 30.” Petition for Rehearing at 7 (emphasis in original). He concludes “under the controlling 1986 Liquidation Agreement, Heritage was to have access to liquidation proceeds in order to remit the withheld employee taxes. The power of Zions Bank to refuse to honor checks made payable to the Internal Revenue Service was not a power ceded to Zions Bank by Bradshaw or any one else on the part of Heritage, through this or any other agreement.” Petition for Rehearing at 7-8 (emphasis in original). We disagree.

As noted in our opinion, the power to refuse to honor checks made payable to the IRS was ceded to the Bank by Bradshaw through the May 1986 agreement. See maj. op. at 1180. Moreover, Bradshaw misinterprets the Liquidation Agreement. He reads ¶¶ 12, 20 and 30 to mean that “the first obligation to be satisfied from the assets of Heritage was the remittance of any tax obligations of Heritage.” Petition for Rehearing at 7. However, nowhere in these or any other provisions of the Liquidation Agreement does the Bank agree to honor cheeks to pay thwe taxes.³ In light of Bradshaw's knowledge that the taxes were not being paid and that the Bank had refused his previous requests to approve checks to the IRS, Bradshaw could have insisted on such a provision. He did not. Thus, there is nothing in the Liquidation Agreement which absolves Bradshaw of his obligation to see that the taxes were paid. Therefore, for the third quarter 1986 taxes Bradshaw was a “responsible person.”

Willfulness

Bradshaw states that he “insisted on the inclusion in the 1986 Liquidation Agreement of provisions for the payment of taxes, with the full knowledge that like provisions were not provided in the May 1985 Agreements” and that he “operated under the belief that as negotiated and agreed to, those taxes would be paid as funds became available through Zions Bank’s liquidation of Heritage assets.” Petition for Rehearing at 13. Therefore, he argues, he “did not at any point make a voluntary, conscious and intentional decision to not effect payment of the withheld taxes to the United States.” Id. We disagree.

For the fourth quarter 1985 penalty and the first and second quarter 1986 taxes, Bradshaw’s voluntary agreement to cede power over the accounts to the Bank in the event of default, coupled with his knowledge that other creditors were being paid when the IRS was not, is sufficient to make his failure to pay the taxes willful. As for the third quarter 1986 taxes, there is nothing in the Liquidation Agreement which requires the Bank to pay the taxes from the liquidation proceeds. Instead, it was Bradshaw and the other Borrowers, who agreed to pay the taxes out of the proceeds. Liquidation Agreement ¶ 30, Appellee’s Supplemental Appendix at 92. There is nothing in the Liquidation Agreement that alters the Bank’s power to refuse to honor checks to the IRS. Bradshaw could have insisted on such a provision, but did not. His failure to do so in the face of his knowledge of the unpaid tax obligations satisfies us that he voluntarily and consciously failed to pay the third quarter taxes, and therefore his failure to pay was willful.

Finally, as noted in our opinion, Bradshaw could have resigned and shut down the business when the Bank refused to approve the payment of the taxes. Instead he voluntarily continued to conduct business, and later carried out the liquidation of the business, with full knowledge of the unpaid taxes. We are convinced that his failure to pay the taxes was willful.

Accordingly, the petition for rehearing is DENIED.

1 . Even assuming that Bradshaw's assertion that the Bank's control over HBP’s finances was not authorized is correct, that still would not demonstrate that Bradshaw was not a "responsible person.” If the Bank was breaching its obligations to Bradshaw, Bradshaw should have refused to sign any checks for creditors other than the government. He should have demanded that the Bank authorize the payment of taxes and if the Bank refused, he could have resigned and ceased doing business. Thus, Bradshaw’s assertion that the Bank "independently instituted” a change in the banking operations, Petition at 4, is beside the point. Even if the Bank lacked authority to do what it did, that does not excuse Bradshaw’s continuing his business and paying other creditors in the face of unpaid tax obligations.

2 . The Liquidation Agreement provided in part:

12. Except as expressly provided in this paragraph 12, the Borrowers each represent that, after diligent inquiry, to the best of their knowledge and belief, they have fully complied and will continue to fully comply with all applicable laws, statutes, rules, regulations, orders, and restrictions of any domestic or foreign governmental authority having jurisdiction over any of the Borrowers, their businesses, or their properties. To the best of the Borrowers' current knowledge, the Borrowers currently owe state and federal taxes which are due and unpaid, and which are fully disclosed on financial statements furnished to Zions and on Exhibits to this Agreement.

20. Surrender of Personal Property. Contemporaneous with the execution of this Agreement, and continuing thereafter, the Borrowers shall surrender possession to Zions of all personal property described in the Inventory and Accounts Receivable Security Agreement, as amended, the Business Security Agreement and the Trust Deeds identified in paragraph 2 above, and shall fully cooperate and assist Zions in disposing of such personal property in accordance with all of Zions’ existing legal and equitable rights and remedies. The Borrowers shall receive full credit against the loans described in subparagraphs 1(a), 1(b) and 1(c) above for any proceeds of such disposition received by Zions, after payment of any costs and expense of such disposition, including reasonable attorney’s fees and legal expenses incurred by Zions and compensation to J. Larry Bradshaw in accordance with paragraph 23 below, and after payment of $5,000 to counsel for the Borrowers in accordance with paragraph 27 below, and after the payment of any taxes and assessments under paragraph 30 below.

30. Taxes and Assessments. Except on that real property transferred in fee to Zions, as set forth in paragraph 19 above, the Borrowers covenant that the Borrowers shall pay, when due, from the proceeds of disposition of property as described in paragraph 20 above, all lawfully imposed taxes on the property described in paragraphs 2 and 3 above and all other lawfully imposed taxes, except and so long as the Borrowers lawfully contest such taxes in good faith and set aside adequate reserves therefore.

Appellee’s Supplemental Appendix at 80, 84-85, 92 (emphasis added).

3 . Paragraph 12 merely acknowledged that the Borrowers owed state and federal taxes. Paragraph 20 described the method for determining how the Borrowers would receive credit against their loans for the proceeds of the disposition of assets. In ¶ 30, the Borrowers agree to pay lawfully imposed taxes from the disposition of property.