RAYMOND T. NAKANO, Plaintiff-Appellant,
UNITED STATES OF AMERICA, Defendant-Appellee
Argued and Submitted January 16, 2014, San Francisco, California
Appeal from the United States District Court for the District of Arizona. D.C. No. 2:08-cv-01026-ROS. Roslyn O. Silver, Senior District Judge, Presiding.
Richard D. Salgado (argued) and Laura L. Gavioli, SNR Denton U.S. LLP, Dallas, Texas, for Plaintiff-Appellant.
Jennifer M. Rubin (argued) and Robert W. Metzler, Attorneys, and Kathryn Keneally, Assistant Attorney General, Tax Division, United States Department of Justice, Washington, D.C., for Defendant-Appellee.
Before: Diarmuid F. O'Scannlain, Susan P. Graber, and Jacqueline H. Nguyen, Circuit Judges.
GRABER, Circuit Judge.
Plaintiff Raymond T. Nakano served as Senior Vice President and Chief Financial Officer of National Airlines, Inc. (" National" ), from its founding in 1995 until it filed for Chapter 7 bankruptcy in May 2003. The Internal Revenue Service (" IRS" ) assessed unpaid excise taxes against Plaintiff personally, pursuant to 26 U.S.C. § 6672. He then brought this civil action against the United States, pursuant to 26 U.S.C. § 7422, for a refund of taxes erroneously assessed. The government filed a counterclaim for the unpaid balance of the tax assessments. The district court granted summary judgment to the government on both the claim and the counterclaim.
In considering this timely appeal, we address two questions: (1) whether the district court erred in holding that Plaintiff's failure to pay the excise taxes was " willful" within the meaning of 26 U.S.C. § 6672(a) despite the airline's bankruptcy and (2) whether § 6672 liability applies to excise tax payments deferred under the Air Transportation Safety and System Stabilization Act (" Stabilization Act" ), Pub. L. No. 107-42, § 301(a)(1) (2001). Reviewing those legal questions de novo, Ilko v. Cal. State Bd. of Equalization (In re Ilko), 651 F.3d 1049, 1052
(9th Cir. 2011) (order), we affirm. We hold that: (1) assets are " encumbered" for purposes of § 6672 only if " the taxpayer is legally obligated to use the funds for a purpose other than satisfying the preexisting employment tax liability and if that legal obligation is superior to the interest of the IRS in the funds," Honey v. United States, 963 F.2d 1083, 1090 (8th Cir. 1992), a test that is not met here; and (2) the Stabilization Act does not " allow the airlines to use the excise taxes as working capital" and does not defeat trust status for unpaid excise taxes for purposes of personal liability under § 6672, Conway v. United States, 647 F.3d 228, 236 (5th Cir. 2011).
Federal law requires all airlines to collect certain excise taxes from passengers and to remit those taxes, held in trust, to the federal government at quarterly intervals. 26 U.S.C. § § 4261, 4291, 7501. The airline passengers have original liability for the excise taxes, but the airlines incur liability for the taxes if they fail to transfer the trust funds on time. Begier v. Comm'r, 496 U.S. 53, 55, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990).
National began flying passengers in 1999, but it did not report a profit for any year during its operation. The airline filed for Chapter 11 bankruptcy on December 6, 2000. Shortly before that filing, National mailed to the IRS its quarterly excise payment check for the third quarter of 2000, in the amount of $1,832,501.01. The IRS received and deposited the check but, before it could clear, National restructured its accounts under Chapter 11 rules, and the check was returned unpaid. National made no additional efforts to pay the quarterly excise taxes, but it did begin to pay other excise taxes collected during the bankruptcy period.
In response to the terrorist attacks on September 11, 2001, Congress passed the Stabilization Act. Among many other provisions, the Act gave airlines an opportunity to defer transfer of the third-quarter 2001 excise taxes for a few weeks after the usual due date. Stabilization Act § 301(a)(1). The Act included a grant of discretionary authority to the Secretary of the Treasury to further extend the third-quarter 2001 and fourth-quarter 2001 excise tax due dates until January 15, 2002, an option that the Secretary exercised. Id. § 301(a)(1)(A). The Act also provided that airlines could collect direct government grants. Id. § 101(a). National received such a grant, in the amount of $21 million. It did not pay excise taxes during the deferral period.
On January 15, 2002, the deadline set by the IRS to transfer excise taxes collected, National filed a return, without enclosing payment, and requested a six-month extension. National did not submit payment for those taxes after requesting the extension, but it did submit payments and returns for later quarters. On January 30, 2002, National again filed a return for fourth-quarter 2001 excise taxes, but again failed to submit any payment.
Nine months later, National ceased operations and, on May 7, 2003, the airline converted its bankruptcy to Chapter 7. On January 29, 2003, during Chapter 7 proceedings, the IRS demanded that National remit unpaid excise taxes in the amount of $11,572,151.91. Following an administrative appeal of an earlier assessment, the government reissued assessments against Plaintiff personally in the amounts of $148,325.00, $3,497,448.32, and $4,803,626.85, for the taxable quarters ending September 30, 2000, September 30, 2001, and December 31, 2001, respectively, ...