United States v. Richard Musal

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 06-1774
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Donald R. Ferguson, *
*
Plaintiff, *
*
v. *
*
United States of America, *
*
Defendant/Appellee, * Appeal from the United States
* District Court for the
v. * Southern District of Iowa.
*
Richard Musal, *
*
Third Party Defendant/ *
Appellant, *
*
Nicholas P. Miller, *
*
Third Party Defendant. *
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Submitted: January 11, 2007
Filed: April 27, 2007
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Before WOLLMAN and MELLOY, Circuit Judges, and *NANGLE,1 District Judge.
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1
The Honorable John F. Nangle, United States District Judge for the Eastern
District of Missouri, sitting by designation.
WOLLMAN, Circuit Judge.
This case arises from an assessment of trust fund recovery penalties pursuant
to 26 U.S.C. § 6672 against Richard Musal and several other individuals involved in
the operation of AccessAir, Inc. (AccessAir). Musal appeals from the district court’s2
grant of summary judgment, which found Musal to be a responsible person under §
6672. Musal also appeals from the district court’s denial of his motions for a new trial
and judgment as a matter of law. We affirm.
I.
AccessAir, a wholly owned subsidiary of AccessAir Holdings, Inc. (Holdings),
was a corporation that provided commercial passenger air transportation within the
continental United States. It operated from February 1999 until November 1999,
when it filed for bankruptcy. Musal served as the Chief Financial Officer (CFO) of
AccessAir from its inception, and as President and Chief Operating Officer (COO) of
AccessAir starting in August 1999. As the CFO, Musal was in charge of overseeing
the company’s finances and accounting and was authorized to sign checks on behalf
of AccessAir. Once Musal became President and COO, all of AccessAir’s
departments reported to him.
In its second, third, and fourth quarters of 1999, AccessAir failed to remit to the
Internal Revenue Service (IRS) excise taxes that were collected from the sales of
airline tickets as required by 26 U.S.C. § 4261.3 Using a worksheet provided to him
2
The Honorable James E. Gritzner, United States District Judge for the Southern
District of Iowa.
3
Under § 4261, customers purchasing airline tickets are required to pay a tax
that is based upon a percentage of the ticket’s price plus a flat rate per each domestic
flight segment. 26 U.S.C. § 4261(a), (b) (2006). In 1999, these taxes were imposed
at eight percent of the ticket price and $2.00 per segment for tickets sold prior to
-2-
by AccessAir (later marked as Exhibit 4050), IRS Revenue Agent Jerry Robertson
determined that the company’s total excise tax liability for these three quarters was
$1,404,404.09 and thereafter made the corresponding assessments against the
company. When AccessAir failed to pay the amount due, the IRS, pursuant to 26
U.S.C. § 6672,4 assessed a trust fund recovery penalty in the amount of $1,300,552.09
against Musal and two other company officials – Roger Ferguson and Nicholas
Miller.5 After Ferguson filed a claim for a refund of his trust fund recovery penalty,
the government brought a counterclaim against Ferguson, Miller, and Musal seeking
to reduce to judgment the assessed penalties.
The government brought a cross-motion for summary judgment against Musal
and Miller. The district court granted the government’s motion against Musal, finding
him to be a responsible person under § 6672 and concluding that he had not carried
his burden of proof in showing that the excise tax assessment was erroneous or
excessive, but denied the government’s motion as to Miller. The case against
Ferguson and Miller subsequently proceeded to trial, at which Ferguson was found to
be a responsible person for the second and third quarters of 1999, Miller was not
found to be a responsible person for any quarter, and the excise tax assessments for
the second and third quarters were found to be erroneous and excessive. Musal
thereafter moved for reconsideration of the district court’s previous grant of the
government’s motion for summary judgment against him. The district court granted
Musal’s motion in part and set aside the portion of its previous order regarding
October 1, 1999, and at seven-and-one-half percent of the ticket price and $2.25 per
segment for tickets sold after September 30, 1999. 26 U.S.C. § 4261(a), (b), (e)(5).
4
Under § 6672, any person who is required to collect and pay over a tax, and
who willfully fails to do so, can be held liable for a penalty equal to the total amount
of the tax not paid. 26 U.S.C. § 6672(a) (2002).
5
Ferguson had served as the CEO of Holdings and the President of AccessAir
prior to Musal. Miller had served as the controller of AccessAir.
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Musal’s liability for the amount of the assessment, but left in place its holding that
Musal was a responsible person under § 6672. The court thereafter set for trial the
sole issue of the accuracy of the second, third, and fourth quarter penalty assessment
amounts against Musal.
Prior to trial, the district court granted Musal’s motion for partial summary
judgment, holding that collateral estoppel barred the government from relitigating the
assessment amounts for the second and third quarters, which had previously been
determined by the jury at Ferguson’s and Miller’s trial. This left the accuracy of the
fourth quarter assessment as the sole issue remaining for trial. The court also denied
the government’s motion to take the trial deposition of Gordon Rosen, because he was
not listed on the pretrial conference order and was not identified as having information
relevant to the assessments.
The jury heard testimony from a number of individuals, including Rosen, who
was allowed to testify despite the district court’s prior deposition ruling. A number
of exhibits were also presented, including Exhibit 4050 (the worksheet provided by
AccessAir to Robertson) and Exhibit 4502 (an alleged summary of AccessAir’s
reservation accounting records). The jury was instructed that the IRS’s assessment
was presumptively correct and that Musal carried the burden of proving that the
assessment was erroneous and excessive. The jury’s verdict found that Musal had not
proved that the fourth quarter assessment was erroneous or excessive. Judgment was
accordingly entered against Musal for $452,934.85 – the amount of the IRS’s fourth
quarter assessment.
Musal subsequently filed motions for judgment as a matter of law and for a new
trial, arguing that the fourth quarter assessment should not have been accorded a
presumption of correctness and that Exhibits 4050 and 4502, as well as Rosen’s
testimony, were erroneously admitted into evidence. The district court denied both
motions.
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II.
We first address whether the district court erred in granting summary judgment
for the government on the issue of Musal’s status as a responsible person. “We
review a district court’s grant of summary judgment de novo.” Keller v. United
States, 46 F.3d 851, 853 (8th Cir. 1995). Summary judgment is proper if the “record,
when viewed in the light most favorable to the nonmoving party, shows that there is
no genuine dispute of material fact and that the moving party is entitled to judgment
as a matter of law.” Id.
To incur liability under 26 U.S.C. § 6672, an individual must be a responsible
person and must willfully fail to pay over the taxes in question. Jenson v. United
States, 23 F.3d 1393, 1394 (8th Cir. 1994). A responsible person is someone who has
“‘the status, duty and authority to avoid the corporation’s default in collection or
payment of the taxes.’” Barton v. United States, 988 F.2d 58, 59 (8th Cir. 1993)
(quoting Kenagy v. United States, 942 F.2d 459, 464 (8th Cir. 1991)). “A responsible
person acts willfully if he ‘acts or fails to act consciously and voluntarily and with
knowledge or intent that as a result of his action or inaction trust funds belonging to
the government will not be paid over but will be used for other purposes, or by
proceeding with a reckless disregard of a known or obvious risk that trust funds may
not be remitted to the government.’” Keller, 46 F.3d at 854 (quoting Honey v. United
States, 963 F.2d 1083, 1087 (8th Cir. 1992)).
The undisputed facts in this case show that Musal was the CFO of AccessAir
throughout the first three quarters of 1999 and the President and COO of AccessAir
throughout the fourth quarter of 1999. In these capacities, Musal was authorized to
sign checks and disburse corporate funds on behalf of AccessAir, and he admits that
he had the authority to pay the company’s excise taxes without board or management
approval. These facts indicate that Musal had at least the initial authority to pay the
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excise taxes. What Musal contends on appeal, however, is that he was divested of this
authority when the board directed him to pay only the obligations of the company that
were necessary to keep the company’s planes in the air. We find this argument
unpersuasive.
First, as noted by the district court and as Musal himself acknowledges, the
board never explicitly instructed Musal to not pay the excise taxes. Rather, he chose
to forgo doing so in order to pay other company expenses. He therefore retained the
authority to pay the taxes had he decided to do so. Second, even if the board’s
directive could be construed as an instruction to not pay the taxes, such instructions
“‘do not . . . take a person otherwise responsible under section 6672(a) out of that
category.’” Greenberg v. United States, 46 F.3d 239, 243-44 (3d Cir. 1994) (quoting
Brounstein v. United States, 979 F.2d 952, 955 (3d Cir. 1992)).6 Musal’s argument
that the board’s directive removed him from responsible person status under § 6672
is therefore unavailing.
We are also satisfied that Musal acted willfully in failing to pay the excise
taxes. Musal had knowledge of AccessAir’s financial condition and was fully aware
that the company had not been turning over the required excise taxes for the second,
third, and fourth quarters of 1999. Despite this knowledge, Musal continued to direct
payments to the company’s other creditors in lieu of paying the excise taxes. These
facts support a determination that Musal’s failure to pay the required excise taxes was
willful. Olsen v. United States, 952 F.2d 236, 240 (8th Cir. 1991) (“Evidence that the
6
In his reply brief, Musal argues that we had previously addressed and rejected
this principle in United States v. Bisbee, 245 F.3d 1001 (8th Cir. 2001). That is not
the case. Although we did in fact mention this principle in Bisbee, our holding that
the individual was not a responsible person was not based on the fact that the
individual had received instructions from his superiors to not pay the taxes; nor did
we hold that such instructions would in fact absolve the individual from such liability.
Bisbee, 245 F.3d at 1008. Rather, our holding was based on our determination that
the individual did not have the authority to pay the taxes in the first place. Id.
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responsible person had knowledge of payments to other creditors, including
employees, after he was aware of the failure to pay over withholding taxes is proof of
willfulness as a matter of law.”).
We therefore conclude that the district court did not err in granting summary
judgment for the United States on the issue of Musal’s status as a responsible person.
III.
We next turn to whether the district court erred in denying Musal’s motion for
a new trial. Musal contends that this motion should have been granted because the
district court erred in admitting Exhibits 4050 and 4502, in permitting Rosen to testify
at trial, and in instructing the jury that the IRS’s assessment was presumed to be
correct. We review a district court’s evidentiary rulings, jury instructions, and denial
of a new trial for abuse of discretion, according substantial deference to the district
court’s rulings. Moses.com Sec., Inc. v. Comprehensive Software Sys., Inc., 406 F.3d
1052, 1059 (8th Cir. 2005); Campos v. City of Blue Springs, Mo., 289 F.3d 546, 551
(8th Cir. 2002).
A. Exhibit 4050
Exhibit 4050 is a spreadsheet containing figures regarding AccessAir’s excise
tax liabilities for the second, third, and fourth quarters of 1999. It was provided to
Robertson by Charles Collins, Miller’s successor as the controller of AccessAir. This
spreadsheet was the sole basis for the amount of excise tax that the IRS assessed
against AccessAir for the fourth quarter of 1999. At trial, Musal objected to the
admission of Exhibit 4050 as not having sufficient authentication, foundation, or
identification, as being irrelevant and unfairly prejudicial, as constituting hearsay, and
as an improper summary document. The district court overruled the objections and
admitted the exhibit, opining that it was being offered to show what the IRS relied on
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in making its assessment and not for the truth of the financial information contained
therein. The district court also refused to give a requested limiting instruction to the
jury regarding the exhibit because the exhibit was “some evidence of what the
assessment should have been.” On appeal, Musal argues that Exhibit 4050 was
inadmissible hearsay, that a limiting instruction should have been given, and that the
exhibit was not properly identified or authenticated.
Under Rule 801(c) of the Federal Rules of Evidence, an out of court statement
is hearsay only if it is offered to prove the truth of the matter asserted. FED. R. EVID.
801(c); United States v. Looking Cloud, 419 F.3d 781, 787 (8th Cir. 2005). Although
Exhibit 4050 was in fact an out of court statement, it was not admitted to prove the
truth of matters asserted, i.e., that the figures contained on the spreadsheet were
accurate calculations of what the excise tax should be. Rather, it was admitted as
evidence of what the IRS had relied on in making its assessment. Accordingly, the
district court did not err in admitting Exhibit 4050 for this purpose.
As for the limiting instruction, Rule 105 of the Federal Rules of Evidence
provides that “[w]hen evidence which is admissible . . . for one purpose but not
admissible . . . for another purpose is admitted, the court, upon request, shall restrict
the evidence to its proper scope and instruct the jury accordingly.” FED. R. EVID. 105.
Here, the district court refused to grant Musal’s request for a limiting instruction
regarding Exhibit 4050 because the exhibit was some proof of what the assessment
should have been. Using the exhibit in this way, however, is precluded by the rules
of evidence and contradicts the reason the exhibit was admissible in the first place, as
the jury would in essence be using the figures on Exhibit 4050 to prove the truth of
the matter asserted. We consequently see no good reason why the limiting instruction
should not have been given, and we conclude that the district court erred by failing to
give it.
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Given the other evidence presented at trial, however, we do not consider this
misstep to constitute reversible error. “An evidentiary error is harmless ‘if, after
reviewing the entire record, we determine that the substantial rights of the defendant
were unaffected, and that the error did not influence or had only a slight influence on
the verdict.’” United States v. Crenshaw, 359 F.3d 977, 1003-04 (8th Cir. 2004)
(quoting United States v. Carroll, 207 F.3d 465, 470 (8th Cir. 2000)). Revenue figures
from other documents presented at trial support a finding of an excise tax liability for
September and October that is close to, if not more than, the amount assessed by the
IRS for these months,7 and the segment data AccessAir submitted to the Department
of Transportation supports a fourth quarter segment tax liability close to that assessed
by the IRS.8 AccessAir’s balance sheets from September and November of 1999
show an accrued excise tax amount exceeding $1,000,000 and accrued segment fee
tax liability exceeding $400,000. In a letter sent to AccessAir’s board of directors in
December 1999, Musal included a worksheet that estimated the costs of satisfying the
accrued excise taxes to be between 1.5 and 2 million dollars. Additionally, the
statement of financial affairs submitted by AccessAir to the bankruptcy court, and
verified by Musal under penalty of perjury, stated that the amount of excise tax owing
exceeded 1.7 million dollars and that the amount of segment fee tax owing was nearly
$400,000. In light of this significant additional evidence supporting an excise tax
7
Using the sales figures from AccessAir’s unaudited September balance sheet
and the revenue figures from two reports that had been prepared by Musal, the amount
of excise tax accrued by AccessAir based on the percentage of ticket sales would be
either $108,665.60, $127,898.40, or $171,536.80 for the month of September, and
$156,999.97 for the month of October. Any of these amounts would be higher than
the amounts assessed by the IRS for September and October, which were $104,578.81
and $109,807.75 respectively.
8
Depending on one’s interpretation of the segment fee information AccessAir
submitted to the Department of Transportation, the segment fee portion of the excise
tax assessment against AccessAir for the fourth quarter of 1999 could range from as
low as $98,840 to as high as $144,524.50. The segment fee assessed by the IRS for
this quarter was $123,250.14.
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liability similar to or exceeding that found on Exhibit 4050, we conclude that the
district court’s refusal to give a limiting instruction regarding the use Exhibit 4050
was harmless.
We further conclude that Exhibit 4050 was sufficiently identified and
authenticated for purposes of Rule 901(a) of the Federal Rules of Evidence. Because
Exhibit 4050 was admitted solely to show the basis of the assessment, the United
States was not required to authenticate the actual information contained in the exhibit,
as Musal contends. Rather, the government was required to authenticate only that the
exhibit was what they asserted it to be, that is, a spreadsheet from AccessAir that the
IRS had relied on in calculating the assessment amount. See United States v. Wadena,
152 F.3d 831, 854 (8th Cir. 1998) (“A party authenticates a document by presenting
evidence sufficient to support a finding that the document is what the party claims it
to be.”). Robertson’s testimony constituted adequate authentication for this purpose.
B. Gorden Rosen’s Testimony
Gorden Rosen was the President of ARM Software, the company that provided
the accounting software utilized by AccessAir. Prior to Musal’s trial, the government
filed a motion to take the deposition of Rosen and three other individuals for purposes
of preserving their testimony for trial. A magistrate judge9 denied the government’s
motion, stating that he found “no compulsion to allow these three witnesses to testify
at any trial against Musal” because there had been no showing that these witnesses
possessed any crucial information necessary for Musal’s trial. D. Ct. Order of Dec.
3, 2004, at 5. The district court denied the government’s motion to reconsider this
decision, opining that the orders were not clearly erroneous or contrary to law. At
trial, however, the district court permitted Rosen to testify, but stated that his
9
The Honorable Thomas J. Shields, United States Magistrate Judge for the
Southern District of Iowa.
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testimony would be limited to questions regarding the validity of the software system,
what had to be changed in the software system, and what he had been asked to do in
the process of cleaning up the company’s accounting system. Musal argues that the
district court erred in allowing Rosen to testify and, alternatively, that Rosen’s
testimony was not properly limited.
In its opinion denying Musal’s post-trial motions, the district court stated that
Rosen was permitted to testify because the court learned for the first time at the
beginning of trial that Musal’s defense was based in part on the inaccuracy of Rosen’s
software, thereby making Rosen’s testimony significantly more relevant. In light of
this new information, the court concluded that, notwithstanding its prior order, it
should allow Rosen to testify. Musal contends that in the absence of a finding that the
magistrate judge’s ruling was clearly erroneous or contrary to law, the district court
was precluded from allowing Rosen to testify. Musal further argues that the district
court could not take into account any new information regarding the use of Rosen’s
testimony when reconsidering the magistrate judge’s ruling.
A district court may reconsider a magistrate judge’s ruling on nondispositive
pretrial matters where it has been shown that the ruling is clearly erroneous or
contrary to law. 28 U.S.C. § 636(b)(1)(A) (2006). In this case, however, we do not
interpret the district court’s decision to allow Rosen’s testimony at trial to be a
reconsideration of the magistrate judge’s order. The magistrate judge’s order
addressed solely the issue of whether the government would be permitted to take the
depositions for purposes of preserving testimony for trial under Rule 32(a)(3)(B) of
the Federal Rules of Civil Procedure. While the magistrate judge based his decision
on his belief that Rosen did not possess relevant information, the magistrate judge’s
refusal to allow these depositions did not preclude the district court from allowing the
government to call Rosen as a witness at trial, particularly in light of the information
acquired by the district court subsequent to its affirmance of the magistrate judge’s
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order. Further, the district court’s decision permitting Rosen to testify was not
unfairly prejudicial to Musal.
With respect to Musal’s alternative argument, we are satisfied that Rosen’s
testimony at trial was sufficiently limited and that the district court did not err in
admitting it.
C. Exhibit 4502
Exhibit 4502 was a two-page report that had been prepared by Rosen after
AccessAir contacted him to review its accounting system. According to Rosen, the
first page of the report summarized AccessAir’s accounting information that had
already been processed prior to beginning his review, and the second page
summarized accounting information that had yet to be processed. Over Musal’s
objections, the district court allowed Exhibit 4502 to be admitted at trial. The
government thereafter used Exhibit 4502 in conjunction with Rosen’s testimony to
help demonstrate Rosen’s understanding of AccessAir’s accounting system and the
process he went through in reviewing it. M u s al co n ten d s th at E x h i b i t 4 5 0 2
constituted inadmissible hearsay, that it was not an admissible summary, and that it
was unreliable and untrustworthy.
As explained by the district court in its opinion denying Musal’s post-trial
motions, Exhibit 4502 was admitted because it “contains information that explains
Rosen’s efforts, his understanding, and his review of the accounting systems, without
regard to the truth of the statements contained in Exhibit 4502.” D. Ct. Order of Jan.
25, 2006, at 21. Accordingly, the exhibit did not constitute inadmissible hearsay, see
FED. R. EVID. 801(c), and the district court did not abuse its discretion in admitting it.
Musal’s argument that Exhibit 4502 should have been excluded because the district
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court failed to give a limiting instruction regarding its use is also unpersuasive.
Because Musal failed to request that such instruction be given, we review the district
court’s failure to do so for plain error, United States v. Campbell, 937 F.2d 404, 408
(8th Cir. 1991), and we find none here.
Musal’s argument that the district court erred in admitting Exhibit 4502 because
it was unreliable and untrustworthy as a matter of law is also without merit. While we
recognize that some of the figures contained in the exhibit may have been inaccurate,10
the exhibit was not admitted to prove the truthfulness of such figures, and the alleged
inaccuracies do not make the exhibit unreliable or untrustworthy as a whole, or as a
matter of law. Further, Musal was free to contest the accuracy of Exhibit 4502 at trial.
D. Presumption of Correctness
Musal asserts that the IRS’s assessment was “naked,” or without any
foundation, because Exhibit 4050 should not have been admitted into evidence or,
alternatively, because the exhibit was not a legally sufficient basis for the assessment.
As a naked assessment, Musal contends that it should not have received a presumption
of correctness, and that the district court therefore erred when it instructed the jury
accordingly.
Assessments under § 6672 are ordinarily presumed to be correct. Riley v.
United States, 118 F.3d 1220, 1221 (8th Cir. 1997). This presumption applies even
if the assessment is based on an estimate, so long as the method for making the
assessment is reasonable and logical. Dodge v. Commissioner, 981 F.2d 350, 353 (8th
Cir. 1992) (“[T]he assessment is intended to be an estimate. It is expected to be
10
Exhibit 4502 reflected ticket sale revenue for the month of December 1999,
which was after AccessAir had ceased operations and filed for bankruptcy.
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rational, not flawless.”). An assessment will not be entitled to such presumption,
however, if it is determined to be a naked assessment. Id. We have defined a naked
assessment as one made “without any foundation whatsoever, or without some
predicate supporting evidence.” Id.
The IRS’s assessment in this case did not constitute a naked assessment. As
recounted above, Exhibit 4050 was the basis for the IRS’s assessment, and was
admissible at trial for precisely that reason. The fact that it was admitted to show only
what the IRS relied on, and not the truth of its contents, does not preclude the
presumption from applying. Cf. Portillo v. Commissioner, 932 F.2d 1128, 1133 (5th
Cir. 1991) (“The presumption of correctness generally prohibits a court from looking
behind the Commissioner’s determination even though it may be based on hearsay or
other evidence inadmissible at trial.”). Further, we find the IRS’s reliance on Exhibit
4050 to be both reasonable and logical, despite its alleged inaccuracies, given the fact
that it had been obtained from AccessAir and was the only information made available
to the IRS at the time of the assessment. See Caulfield v. Commissioner, 33 F.3d 991,
993-94 (8th Cir. 1994) (“Taxpayers who cannot produce adequate records ‘may not
complain of the inevitable inaccuracies in assessment their default occasions.’”
(quoting Dodge, 981 F.2d at 353)). Exhibit 4050 therefore constituted sufficient
predicate evidence supporting the assessment, and the district court did not err in
according the assessment a presumption of correctness.
For the foregoing reasons, we conclude that the district court did not err in
denying Musal’s motion for a new trial.
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IV.
Finally, Musal contends that the district court erred in denying his motion for
judgment as a matter of law. “We review de novo a district court’s denial of a motion
for judgment as a matter of law, examining the evidence in the light most favorable
to the prevailing party and viewing all inferences in the prevailing party’s favor.”
Zutz v. Case Corp., 422 F.3d 764, 769 (8th Cir. 2005). Such a judgment “is
appropriate only where the evidence is entirely insufficient to support the verdict.”
Belk v. City of Eldon, 228 F.3d 872, 878 (8th Cir. 2000). After reviewing the
evidence in the light most favorable to the government, we conclude that it is
sufficient to support the verdict and that the district court therefore did not err in
denying the motion.
The judgment is affirmed.
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