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Airline Officer Seeks Review of Trust Fund Penalty Liability

APR. 21, 2014

Raymond T. Nakano v. United States

DATED APR. 21, 2014
DOCUMENT ATTRIBUTES

Raymond T. Nakano v. United States

 

IN THE

 

SUPREME COURT OF THE UNITED STATES

 

 

On Petition For A Writ Of Certiorari to the

 

United States Court Of Appeals

 

for the Ninth Circuit

 

 

PETITION FOR A WRIT OF CERTIORARI

 

 

C. MICHAEL MOORE

 

Counsel of Record

 

M. TODD WELTY

 

LAURA L. GAVIOLI

 

RICHARD D. SALGADO

 

DENISE M. MUDIGERE

 

DENTONS US LLP

 

2000 McKinney, Suite 1900

 

Dallas, TX 75201

 

(214) 259-0900

 

c.michael.moore@dentons.com

 

 

April 21, 2014

 

 

QUESTIONS PRESENTED

 

 

The Trust Fund Recovery Penalty, 26 U.S.C. § 6672, allows the United States to hold a company's officers personally liable for 100-percent of a company's unpaid tax obligations. Circuits are split whether this is a strict liability penalty. Some circuits -- including the Ninth Circuit from which this Petition arises -- do not recognize a reasonable cause defense to Section 6672 liability. Other circuits, including the Tenth Circuit, "avoid a 'strict liability' interpretation of § 6672" by recognizing reasonable cause as a defense. This split rears its head here because Congress' emergency enactment of the Air Transportation Safety and System Stabilization Act cast into doubt whether excise taxes collected by National Airlines in late-2001 were still subject to the Section 6672 penalty.

The first question presented is:

 

1. Whether the Government may apply the Trust Fund Recovery Penalty under 26 U.S.C. § 6672 based on strict liability even when Congress' own action could be reasonably understood as permitting temporary use of "trust funds?"

 

The Petition also presents a second question concerning application of 26 U.S.C. § 6303, which conditions exercise of the Internal Revenue Service's extraordinary lien and levy powers against a taxpayer on satisfaction of two requirements: (1) a notice and demand under 26 U.S.C. § 6303 and (2) notice of the taxpayer's right to a Collection Due Process hearing under 26 U.S.C. § 6330.

The second question presented is:

 

2. In exercising its extraordinary powers to seize a taxpayer's assets via lien and levy, can the IRS cure its violation of statutory notice requirements under § 6303 by complying with an entirely different statute, § 6330?
PARTIES TO THE PROCEEDINGS

 

 

Petitioner is Raymond T. Nakano.

Respondents are the United States of America, and Commissioner of Internal Revenue.

                           TABLE OF CONTENTS

 

 

 QUESTIONS PRESENTED

 

 

 PARTIES TO THE PROCEEDINGS

 

 

 TABLE OF AUTHORITIES

 

 

 PETITION FOR A WRIT OF CERTIORARI

 

 

 OPINIONS BELOW

 

 

 JURISDICTION

 

 

 STATUTORY AND REGULATORY PROVISIONS INVOLVED

 

 

 STATEMENT OF THE CASE

 

 

 REASONS FOR GRANTING THE WRIT

 

 

 I.  Certiorari Is Warranted To Resolve Whether The Government

 

     May Apply The Trust Fund Recovery Penalty Under 26 U.S.C.

 

     § 6672 Based On Strict Liability

 

 

      A. The Circuit Split

 

 

      B. The Stabilization Act Injected Uncertainty Into Section

 

         6672, Rendering It Unconstitutionally Void For Vagueness

 

         As Applied To Nakano

 

 

           1. Prior To The Stabilization Act, Section 6672 Was

 

              Clear; Nakano Does Not Challenge It On Its Face

 

 

           2. The Stabilization Act Created Ambiguity About What

 

              Conduct Was Punishable Under Section 6672

 

 

 II. Certiorari Is Warranted To Ensure That Federal Courts

 

     Uniformly Enforce The Internal Revenue Code's Protections Of

 

     Taxpayers' Collection Due Process Rights

 

 

 CONCLUSION

 

 

 APPENDIX

 

 

 APPENDIX A: Opinion of the Court of Appeals, Nakano v. United

 

             States

 

 

 APPENDIX B: Final Judgment of the District Court, Nakano v. United

 

             States

 

 

 APPENDIX C: Opinion of the Court of Appeals, Nakano v.

 

             Commissioner

 

 

 APPENDIX D: Opinion of the Tax Court, Nakano v. Commissioner

 

 

 APPENDIX E: 26 U.S.C. § 6303

 

 

 APPENDIX F: 26 U.S.C. § 6330

 

 

 APPENDIX G: 26 U.S.C. § 6672

 

 

 APPENDIX H: Section 301 of the Air Transportation Safety &

 

             System Stabilization Act, Pub. L. 107-42 (H.R. 2926)

 

             (2001)

 

 

 APPENDIX I: House Debates, Passes Airline Relief Bill,

 

             2001 TNT 188-46 2001 TNT 188-46: Congressional Record (Sept. 21, 2001)

 

 

                         TABLE OF AUTHORITIES

 

 

 CASES

 

 

 Bell v. United States, 355 F.3d 387 (6th Cir. 2004)

 

 

 Blackston v. United States, 778 F. Supp. 244 (D. Md. 1991)

 

 

 Bloom v. United States, 272 F.2d 215 (9th Cir. 1959)

 

 

 Carter v. United States, 717 F.Supp. 188 (S.D.N.Y. 1989)

 

 

 Church of the Holy Trinity v. United States, 143 U.S. 457

 

 (1982)

 

 

 Colautti v. Franklin, 439 U.S. 379 (1979)

 

 

 Colosimo v. United States, 630 F.3d 749 (8th Cir. 2011)

 

 

 Conway v. United States, 647 F.3d 228 (5th Cir. 2011)

 

 

 Cox v. Comm'r, 514 F.3d 1119 (10th Cir. 2008)

 

 

 Davis v. United States, 961 F.2d 867 (9th Cir. 1992)

 

 

 Elias v. Connett, 908 F. 2d 521 (9th Cir. 1990)

 

 

 Erwin v. United States, 591 F.3d 313 (4th Cir. 2010)

 

 

 FCC v. Fox Television Studios, 132 S. Ct. 2307 (2012)

 

 

 Finley v. United States, 123 F.3d 1342 (10th Cir. 1997)

 

 

 Garsky v. United States, 600 F.2d 86 (7th Cir. 1979)

 

 

 Giaccio v. Pennsylvania, 382 U.S. 399 (1966)

 

 

 Godfrey v. United States, 748 F.2d 1568 (Fed. Cir. 1984)

 

 

 Grayned v. City of Rockford, 408 U.S. 104 (1972)

 

 

 Greenberg v. United States, F.3d 239 (3d Cir. 1994)

 

 

 Hall v. United States, 132 S.Ct. 1882 (2012)

 

 

 Hill v. Colorado, 530 U.S. 703 (2000)

 

 

 Hochstein v. United States, 900 F.2d 543 (2d Cir. 1990)

 

 

 Howell v. United States, 164 F.3d 523 (10th Cir. 1998)

 

 

 Hughes v. United States, 953 F.2d 531 (9th Cir. 1992)

 

 

 Logal v. United States, 195 F.3d 229 (5th Cir. 1999)

 

 

 Living Care Alternatives of Utica, Inc. v. United States, 411

 

 F. 3d 621 (6th Cir. 2005)

 

 

 Mueller v. Nixon, 470 F.2d 1348 (6th Cir. 1972)

 

 

 Nakano v. Commissioner, 2014 WL 212351 (9th Cir. Jan. 21,

 

 2014)

 

 

 Nakano v. United States, 742 F.3d 1208 (9th Cir. 2014)

 

 

 Olsen v. United States, 414 F.3d 144 (1st Cir. 2005)

 

 

 Phillips v. United States, 73 F.3d 939 (9th Cir. 1996)

 

 

 Popky v. United States, 326 F. Supp. 2d 594 (D. Penn. 2004)

 

 

 Ruth v. United States, 823 F.2d 1091 (7th Cir. 1998)

 

 

 Security Indus. Ins. Co. v. United States, 830 F.2d 581 (5th

 

 Cir. 1987)

 

 

 Slodov v. United States, 436 U.S. 238 (1978)

 

 

 Thosteson v. United States, 331 F.3d 1294 (11th Cir. 2003)

 

 

 Unger v. United States No. 90 Civ. 0384 (WK), 1994 WL 52574

 

 (S.D.N.Y. Feb. 17, 1994)

 

 

 United States v. Am. Trucking Ass'ns, 310 U.S. 534 (1940)

 

 

 United States v. Boyle, 469 U.S. 241 (1985)

 

 

 United States v. California, 507 U.S. 746 (1993)

 

 

 United States v. Champlin Ref. Co., 341 U.S. 290 (1951)

 

 

 United States v. Lanier, 520 U.S. 259 (1997)

 

 

 United States v. Nat'l Dairy Prods. Corp., 372 U.S. 29 (1963)

 

 

 United States v. Pub. Utils. Comm'n, 345 U.S. 295 (1953)

 

 

 United States v. Ragen, 314 U.S. 513 (1942)

 

 

 United States v. Saiermo, 481 U.S. 739 (1987)

 

 

 United States v. Summerlin, 310 U.S. 414 (1940)

 

 

 Winter v. United States, 196 F.3d 339 (2d Cir. 1999)

 

 

 Wright v. United States, 809 F.2d 425 (7th Cir. 1987)

 

 

 STATUTES

 

 

 11 U.S.C. § 503(b)(l)(B)(i)

 

 

 11 U.S.C. § 507(a)(2)

 

 

 26 U.S.C. § 4261

 

 

 26 U.S.C. § 6203

 

 

 26 U.S.C. § 6302

 

 

 26 U.S.C. § 6303

 

 

 26 U.S.C. § 6321

 

 

 26 U.S.C. § 6323

 

 

 26 U.S.C. § 6330

 

 

 26 U.S.C. § 6331

 

 

 26 U.S.C. § 6334

 

 

 26 U.S.C. § 6671

 

 

 26 U.S.C. § 6672

 

 

 26 U.S.C. § 7422

 

 

 26 U.S.C. § 7501

 

 

 26 U.S.C. § 7508A

 

 

 28 U.S.C. § 1254(1)

 

 

 28 U.S.C. § 1346(a)(1)

 

 

 49 U.S.C. § 40101(a)

 

 

 Air Transportation Safety & System Stabilization Act., Pub. L. No.

 

 107-42, § 301(a), 115. Stat. 230 (2001)

 

 

 Economic Growth & Tax Relief Reconciliation Act of 2001, Pub. L. 107-

 

 16 § 802(a), 115 Stat. 38 (2001)

 

 

 Gulf Opportunity Zone Act of 2005, Pub. L. No. 109-135, 119 Stat.

 

 2577 (2005)

 

 

 Internal Revenue Service Restructuring and Reform Act of 1998 ("1998

 

 RRA"), Pub. L. No. 105-206 § 6330, 112 Stat. 685 (1998)

 

 

 Katrina Emergency Tax Relief Act of 2005, Pub. L. 109-73, 119 Stat.

 

 2016 § 403(a) (2005)

 

 

 Pub. L. No. 94-455, 68A Stat. 775 (1954)

 

 

 Pub. L. No. 105-206 § 6330, 112 Stat. 685 (1988)

 

 

 Revenue Act of 1918, Ch. 18, § 1308(e), 40 Stat. 1057, 1143

 

 

 OTHER AUTHORITIES

 

 

 144 Cong. Rec. H5352-06 (1998) WL 336379

 

 

 144 Cong. Rec. S7621-05 (1998) WL 376973

 

 

 147 Cong. Rec. H5684 (daily ed. Sept. 14, 2001)

 

 

 147 Cong. Rec. S9589-01, 2001 WL1703925, (2001)

 

 

 BLACK'S LAW DICTIONARY 926 (7th ed. 1999)

 

 

 I.R.S. Internal Revenue Manual 5.11.1.2.1

 

 

 FINANCIAL STATE OF THE AIRLINE INDUSTRY: HEARING BEFORE S. COMM. ON

 

 COMMERCE, SCI., AND TRANSP., 147th Cong. 42 (Sept. 20, 2001)

 

 

 Frank Lorenzo, Airlines' Woes Didn't Start on Sept. 11, WALL

 

 ST. J., Nov. 14, 2001, at A22

 

 

 H.R. Rep. No. 83-1337 (1954)

 

 

 S. Rep. No. 83-1622 (1954)

 

 

 S. Rep. No. 105-174, 67 (1998)

 

 

 James E. Hungerford, Note, Howard v. United States: Who Should Be

 

 Responsible For the 100% Penalty?, 12 U. PUGET SOUND L. REV. 451,

 

 457 (1989)

 

 

 Jonathan Lewinsohn, Bailing Out Congress: An Assessment and

 

 Defense of The Air Transportation Safety and System Stabilization Act

 

 of 2001, 115 Yale L.J. 438, 441 (2005)

 

 

 Mary A. Bedikian, The Pernicious Reach of 26 U.S.C. Section

 

 6672, 13 Va. Tax Rev. 225, 260 (1993)

 

 

 NAT'L COMM'N ON TERRORIST ATTACKS UPON THE UNITED STATES, THE 9/11

 

 COMMISSION REPORT 25 (2004)

 

 

 Press Release, The White House, Statement by the President (Sept. 22,

 

 2001) 2001 WL 1111201

 

 

 Stephen J. Vasek, The Hidden Tax Trap of I.R.C. Section 6672,

 

 67 Ky. L.J. 27, 73 (1978)

 

PETITION FOR A WRIT OF CERTIORARI

 

 

Petitioner Raymond T. Nakano respectfully petitions for a writ of certiorari to review the judgments of the United States Court of Appeals for the Ninth Circuit.

 

OPINIONS BELOW

 

 

The opinion of the Court of Appeals in Nakano v. United States (App., infra, 1a) is reported at 742 F.3d 1208 (9th Cir. 2014). The opinion of the district court (App., infra, 15a) was not selected for publication, but can be found at 2011 WL 7143088 (D. Ariz. Nov. 1, 2011). The opinion of the Court of Appeals in Nakano v. Commissioner (App., infra, 23a) was not selected for publication, but can be found at 2014 WL 212351 (9th Cir. Jan. 21, 2014). The opinion of the Tax Court (App., infra, 26a) can be found at 137 T.C. No. 16, 137 T.C. 209 (2011).

These cases were not consolidated below. They are combined for review in this Petition pursuant to Supreme Court Rule 12.4.

 

JURISDICTION

 

 

The published opinion of the Court of Appeals in Nakano v. United States was entered on February 18, 2014. The opinion of the Court of Appeals in Nakano v. Commissioner was entered on January 21, 2014. The jurisdiction of this Court is invoked under 28 U.S.C. § 1254(1).

 

STATUTORY AND REGULATORY

 

PROVISIONS INVOLVED

 

 

The relevant statutory and regulatory provisions are reproduced in the appendix to this Petition. (App., infra, 41a-54a.)

 

STATEMENT OF THE CASE

 

 

1. This Petition concerns penalties imposed pursuant to 26 U.S.C. § 6672 ("Section 6672") against a corporate officer, Petitioner Raymond Nakano ("Nakano" or "Petitioner"), of National Airlines, Inc. ("National"). Like many other airlines, National faced severe financial hardship following the terrorist attacks of September 11, 2001 ("9/11"). Nakano's efforts to sustain National during this unprecedented time were reasonable and were guided by knowledgeable professionals, but National eventually liquidated without paying all of its federal excise taxes. The IRS alleges that Nakano is personally liable for over $8.5 million in taxes unpaid by the airline directly following 9/11.

2. As the title of 26 U.S.C. § 6672 suggests, the "Trust Fund Recovery Penalty" ("TFRP") applies only to what are deemed "trust funds." Specifically, a narrow category of taxes for which a private business stands in the shoes of the IRS as tax collector and holds collected funds in "trust" until it turns the taxes over to the federal government. Most trust fund recovery penalties are asserted for failure to pay over withheld payroll taxes, i.e., federal income tax, social security, and Medicare, but TFRP also applies to excise taxes collected on certain communications services and -- as here -- air transportation. See 26 U.S.C. § 4261. The entity collecting these taxes becomes an agent of the United States and does not hold the collected money for the benefit of itself or even the individuals whose taxes are collected, but rather for the benefit of the United States Treasury. See 26 U.S.C. § 7501 ("Whenever any person is required to collect or withhold any internal revenue tax from any other person and to pay over such tax to the United States, the amount of tax so collected or withheld shall be held to be a special fund in trust for the United States.").

The harsh liability imposed by TFRP is predicated on the bright-line rule that companies cannot use the funds they collect for any other purpose, even temporarily. Because so-called "trust fund taxes" are held in trust, they are subject to strict limitations that -- if breached -- support a finding of "willfulness" and the imposition of personal liability under TFRP. The fundamental premise of the TFRP is that the failure to pay those funds to the Government necessarily means someone improperly diverted the funds for another purpose.

3. The September 11, 2001 terrorist attacks devastated the airline industry, which had already been experiencing difficulty due to the emergence of low-cost carriers, decrease in business demand, and expensive labor contracts negotiated during the 1990s boom. Unable to reduce excess capacity or abrogate labor agreements, the airlines approached Labor Day 2001 facing losses of between $2 and $3 billion. See Jonathan Lewinsohn, Bailing Out Congress: An Assessment and Defense of The Air Transportation Safety and System Stabilization Act of 2001, 115 Yale L.J. 438, 441 (2005). But on 9/11, the industry -- which was already at the breaking point -- saw its "economic rubber band snapped." Frank Lorenzo, Airlines' Woes Didn't Start on Sept. 11, Wall St. J., Nov. 14, 2001, at A22.

Within hours of the attacks, the Federal Aviation Administration issued the first ever national ground-stop order requiring the shutdown of U.S. airspace. See NAT'L COMM'N ON TERRORIST ATTACKS UPON THE UNITED STATES, THE 9/11 COMMISSION REPORT 25 (2004). As a consequence of that order and the American public's subsequent fear of flying post-9/11, airlines were hemorrhaging hundreds of millions of dollars per day and the industry was on the brink of financial collapse. FINANCIAL STATE OF THE AIRLINE INDUSTRY: HEARING BEFORE S. COMM. ON COMMERCE, SCI., AND TRANSP., 147th Cong. 42 (Sept. 20, 2001). As Representative Don Young, Chairman of the House Transportation and Infrastructure Committee, challenged his colleagues:

 

[I]f my colleagues decide not to support this bill, then my colleagues suffer the facts, because my colleagues will not be able to fly. And I said, ride your horses, paddle your canoes, and go where you think you may go. But the airline industry, and I am the chairman of this committee, is in serious, serious trouble.

 

147 Cong. Rec. H5684 (daily ed. Sept. 14, 2001). Senator Kit Bond echoed those sentiments: "Let me be clear; if we delay passing this bill . . . we risk causing a tremendous economic calamity." 147 Cong. Rec. S9589-01, 2001 WL1703925, (2001) (emphasis added). In short, without immediate assistance from the Government, the demise of the airline industry was imminent.

In an urgent effort to save the airline industry, Congress enacted, and President George W. Bush signed into law, the Air Transportation Safety and System Stabilization Act ("Stabilization Act" or "Act") of 2001 on September 22, 2001. Pub. L. No. 107-42, 115 Stat. 230 (codified at 49 U.S.C. § 40,101) (App., infra, 53a.). The Act's purpose was clear: save the airline industry. Id. ("An Act To preserve the continued viability of the United States air transportation system.").

Along with other forms of relief including direct compensation and loan guarantees, a key provision of the Stabilization Act was Section 301(a), which postponed airlines' payment of collected federal excise taxes. Similar to the withholding of employee income tax, airlines collect these taxes from their passengers on each ticket sold on behalf of the Government, hold the taxes in trust, and remit them on regular intervals as federal tax deposits. See 26 U.S.C. § 4261. Section 301(a) of the Stabilization Act deferred the airlines' payment of those taxes for the first time in history:

 

(a) EXTENSION OF DUE DATE FOR EXCISE TAX DEPOSITS --

(1) IN GENERAL -- In the case of an eligible air carrier, any airline-related deposit required under section 6302 of the Internal Revenue Code of 1986 to be made after September 10, 2001, and before November 15, 2001, shall be treated for purposes of such Code as timely made if such deposit is made on or before November 15, 2001. If the Secretary of the Treasury so prescribes, the preceding sentence shall be applied by substituting for 'November 15, 2001' each place it appears --

 

(A) 'January 15, 2002'; or

(B) such earlier date after November 15, 2001, as such Secretary may prescribe.

49 U.S.C. § 40101(a).

The deferral of trust fund taxes was unprecedented at the time. Congress and the IRS had afforded disaster relief for tax deadlines prior to 2001, but never on such a large scale and -- most significantly -- never with regard to trust fund taxes. For example, in 1997 Congress enacted 26 U.S.C. § 7508A, authorizing the IRS to defer certain filing and payment deadlines for taxpayers in Presidentially-declared disaster areas, but § 7508A only permitted the deferral of income, estate, or gift tax payments -- not trust fund tax payments. See ECONOMIC GROWTH & TAX RELIEF RECONCILIATION ACT OF 2001, Pub. L. 107-16 § 802(a), 115 Stat. 38 (2001). But following the Hurricane Katrina disaster in 2005, Congress substantially broadened the IRS's authority under Section 7508A, authorizing deferrals of employment and excise tax payments and filings, thereby allowing affected businesses to avoid cessation of operations. Katrina Emergency Tax Relief Act of 2005, Pub. L. 109-73, 119 Stat. 2016 § 403(a) (2005), amending Section 7508(a)(1)(A-B). Congress passed still more tax relief legislation following the continued devastation wrought by Hurricanes Rita and Wilma over the ensuing weeks. See Gulf Opportunity Zone Act of 2005, Pub. L. No. 109-135, 119 Stat. 2577 (2005). Trust fund tax deferrals now potentially impact taxpayers across the country and will likely continue to be used well into the future in order to keep businesses operating during times of crisis.

4. Recognizing that the Stabilization Act's deferral of excise tax payments would be pointless if airlines could not use those funds to maintain operations, Nakano, National Airline's Board of Directors, and the bankruptcy court all understood that the excise tax deferral provisions of the Stabilization Act permitted the airlines to use those proceeds to cover operating expenses. Accordingly, during the deferral period between September 12, 2001 and January 15, 2002, National used the excise taxes it had collected for the third and fourth quarters of 2001 to cover operating expenses and -- as Congress had encouraged -- "keep its planes in the air."

National was operating at massive losses at that time. Additionally, because National was a debtor-in-possession, National had authority to pay only its day-to-day operating expenses in the ordinary course of business and needed bankruptcy court approval for any extraordinary payments.

After failing to secure necessary additional financing, National ceased operations on November 6, 2002. (National's bankruptcy case was converted to Chapter 7 in May 2003). Because the past-due excise taxes were not paid as a day-to-day expense, they became an administrative expense of the Chapter 11 bankruptcy, subject to second priority. 11 U.S.C. §§ 503(b)(1)(B)(i) & 507(a)(2).

There were numerous second priority claimants, many of whom had claims in excess of the amounts due to the IRS. All of the claims were subject to approval by the bankruptcy court and the bankruptcy court approved $108 million of the claims in January 2004, but the court did not approve the IRS's claim. Indeed, even the allowed claims far exceeded National's assets. National listed its assets as $85 million and its liabilities as $278 million in its monthly operating report for the month that ended March 31, 2003.

5. In response to the Government's assertion that Petitioner is personally liable under Section 6672 for excise tax liabilities that National failed to pay for the September 2001 and December 2001 tax quarters, on June 2, 2008, Petitioner filed suit in the United States District Court for the District of Arizona against the Government under 28 U.S.C. § 1346(a)(1) and 26 U.S.C. § 7422 seeking recovery of taxes paid and abatement of tax amounts assessed against him. On July 9, 2010, the district court denied Petitioner's motion for dismissal of the Government's counter-claim. On November 1, 2011, the district court granted summary judgment in favor of the Government. The district court entered final judgment on November 4, 2011, and Petitioner filed his notice of appeal on December 20, 2012.

Petitioner timely appealed to the United States Court of Appeals for the Ninth Circuit, which affirmed the district court's summary judgment in favor of the Government. Writing for the majority, Judge Garber stated, in part, that the Stabilization Act does not allow excise taxes to be used as working capital and does not defeat trust status for unpaid excise taxes for purposes of personal liability under Section 6672. (App., infra, 2a.)

6. In a parallel case, Petitioner also seeks this Court's intervention regarding the Commissioner of Internal Revenue's ("the Commissioner") right to levy Petitioner's property, specifically the TFRP relating to unpaid excise taxes. Petitioner timely initiated a Collection Due Process ("CDP") administrative hearing to contest the Commissioner's right to levy his property, arguing that the Commissioner failed to issue a timely Notice and Demand as required by 26 U.S.C. § 6303.

On March 28, 2006, the Commissioner assessed the TFRP against Nakano. Fifty-five days later, on May 22, 2006, the Commissioner provided a notice to Nakano under 26 U.S.C. § 6330, advising him of the Commissioner's intent to levy his assets and of his right to a CDP hearing. Seventy days after assessment, on June 6, 2006, the Commissioner issued a Notice and Demand under Section 6303. It is undisputed that the required Section 6303 notice was untimely, having been issued more than sixty days after assessments took place.

After considering the administrative record and the parties' arguments, the settlement officer, Veronica Hernandez, concluded that while the assessments were valid, the Section 6303 Notice and Demand was not mailed within the required sixty-day time period. On August 28, 2008, the appeals team manager, Thomas Menaugh, overruled Ms. Hernandez's conclusion and issued an adverse Notice of Determination in favor of the Commissioner. Petitioner timely appealed the Appeals Office's determination to the United States Tax Court. The Tax Court upheld the Commissioner's determination and the Ninth Circuit affirmed.

 

REASONS FOR GRANTING THE WRIT

 

 

I. Certiorari Is Warranted To Resolve Whether The Government

 

May Apply The Trust Fund Recovery Penalty Under 26 U.S.C. § 6672

 

Based On Strict Liability.

 

 

This Court has made it clear that Section 6672 -- based on its clear plain language -- is not a strict liability statute:

 

Section 6672 cannot be read as imposing upon the responsible person an absolute duty to "pay over" amounts which should have been collected and withheld. The fact that the provision imposes a "penalty" and is violated only by a "willful failure" is itself strong evidence that it was not intended to impose liability without personal fault.

 

Slodov v. United States, 436 U.S. 238, 254 (1978) (emphasis added).

Yet the Ninth Circuit and other circuits persist in reading the "willful failure" language out of the statute by excluding reasonable cause as a valid defense to Section 6672 liability. See BLACK'S LAW DICTIONARY 926 (7th ed. 1999) (Strict liability is "liability that does not depend on actual negligence or intent to harm.").

This creates a seemingly irreconcilable conflict here because strict liability statutes must meet a heightened standard of clarity. "This Court has long recognized that the constitutionality of a vague statutory standard is closely related to whether that standard incorporates a requirement of mens rea." Colautti v. Franklin, 439 U.S. 379, 394-95 (1979) ("[t]he vagueness of [the statute] is compounded by the fact that the Act subjects [citizens] to potential criminal liability without regard to fault."). This is because the perils of strict liability are particularly acute where uncertainty exists in the statute. See id. at 395. The absence of a mens rea requirement in a vague act is "a trap for those who act in good faith." See id. (citing United States v. Ragen, 314 U.S. 513, 524 (1942)).

If the Ninth Circuit's strict liability interpretation of Section 6672 applies, Congress' deferral of excise taxes under the Stabilization Act would render Section 6672 vague and unenforceable in these circumstances. Nakano and other reasonable, similarly-situated individuals simply could not have known what conduct would trigger the strict liability penalty.

But if the Tenth Circuit is correct and reasonable cause is a valid defense, then the Stabilization Act created -- at the very least -- a jury question whether Petitioner Nakano had reasonable cause to not remit excise tax payments to the Government (i.e., because he believed they were no longer trust fund taxes).

Either way, the imposition of Section 6672 liability as a matter of law is improper in the circumstances of this case and similar circumstances likely to repeat in the future. This is thus an important and unresolved question that warrants review.

A. The Circuit Split.

This Court rejected a strict liability standard under Section 6672 in Slodov, holding "the statute cannot be construed to impose liability without fault." 436 U.S. at 254. Still, the majority of appellate courts to consider the issue have applied an effectively strict liability standard, finding corporate officers willful under the statute as a matter of law when they pay creditors with knowledge of the federal tax owing, irrespective of culpability.1 This broad definition of "willful," distinct from any other criminal or civil penalty, effectuates a strict liability penalty on all responsible persons. This is exactly what this Court prohibited in Slodov, and is contrary to congressional intent.2

Some commentators have suggested that this erroneous detour from this Court's precedent arose -- like this appeal -- from the Ninth Circuit. Specifically, that the test originated in the Ninth Circuit decision, Bloom v. United States, 272 F.2d 215, 223 (9th Cir. 1959). See Mary A. Bedikian, The Pernicious Reach of 26 U.S.C. Section 6672, 13 Va. Tax Rev. 225, 260 (1993) (discussing the approval of Bloom); James E. Hungerford, Note, Howard v. United States: Who Should Be Responsible For the 100% Penalty?, 12 U. Puget Sound L. Rev. 451, 457 (1989). The Court of Appeals in Bloom held that willfulness was definitively established by a "voluntary, conscious and intentional act to prefer other creditors of the corporation over the United States." Bloom, 272 F.2d at 223. But as previous commentators have observed, this Court's decision in Slodov came after Bloom and arguably overruled it, since Slodov provides that willfulness cannot be established "without personal fault." See 436 U.S. at 254.

But all circuits do not agree on this issue. In Finley v. United States, 123 F.3d 1342, 1348 (10th Cir. 1997), the Tenth Circuit recognized a "reasonable cause" defense that may be established by showing that the corporate officer made reasonable efforts to protect the trust funds, but that those efforts were frustrated by circumstances outside the officer's control. "Such conclusion appropriately avoids a 'strict liability' interpretation of § 6672 and preserves a role for the jury, as fact finder[.]" Id. The Tenth Circuit also observed that "[w]e are fully aware of the precedent whereby courts have seized on the notion that certain factual paradigms establish willfulness as a matter of law, even though the facts do not involve an intentional failure to pay over withholding taxes to the government." Id. at 1345. The Second Circuit also has recognized a limited reasonable cause defense. An officer's failure to pay taxes is not willful if the officer reasonably believed the taxes were being paid. See Winter v. United States, 196 F.3d 339, 345 (2d Cir. 1999).

B. The Stabilization Act Injected Uncertainty Into Section 6672, Rendering It Unconstitutionally Void For Vagueness As Applied To Nakano.

As applied to Nakano in this case, Section 6672 is void for vagueness because to persons of ordinary intelligence -- including Nakano -- it was not reasonably clear at the time what conduct was prohibited. An individual should not face punishment for violating a law unless the nature of the prohibited conduct can be understood by a reasonable person. FCC v. Fox Television Studios, 132 S. Ct. 2307, 2317 (2012). Laws that are so vague that they leave the public uncertain as to the conduct prohibited are "void for vagueness." Giaccio v. Pennsylvania, 382 U.S. 399, 402-03 (1966). This Court has applied the void for vagueness doctrine for well over a century to strike down the application of laws that do not provide (1) sufficient clarity of the offense, or (2) fair notice of the prohibited activity to citizens of average intelligence. See Hill v. Colorado, 530 U.S. 703, 732 (2000). Under this doctrine, a law must not be vague, and, "either standing alone or as construed, [must make] it reasonably clear at the relevant time" what conduct is punishable. United States v. Lanier, 520 U.S. 259, 267 (1997). This is true of both civil and criminal laws. See Giaccio, 382 U.S. at 402.3

 

1. Prior To The Stabilization Act, Section 6672 Was Clear; Nakano Does Not Challenge It On Its Face.

 

Section 6672 imposes personal liability on corporate officers responsible for the non-payment of a corporation's trust fund tax liabilities, and is predicated on the bright-line rule that companies cannot use the funds they collect for any other purpose, even temporarily. Section 6672 applies only to a narrow category of taxes for which a private business holds collected funds in "trust" until it turns the taxes over to the federal government. See 26 U.S.C. § 4261. Because the taxes are held in trust, they are subject to certain strict limitations, which if breached, warrant the imposition of personal liability under Section 6672. See Mueller v. Nixon, 470 F.2d 1348, 1351 (6th Cir. 1972) ("Absent stringent measures to protect these funds, they might be easily be made available [for other purposes].").

Ordinarily, the failure to pay Section 6672 funds to the government necessarily means that someone improperly diverted the funds for another purpose. See Ruth v. United States, 823 F.2d 1091, 1093 (7th Cir. 1998) ("responsible persons who succumb to the temptation to divert the ready cash of wage withholdings out of the clutches of the IRS face serious consequences"); Finley, 123 F.3d at 1348 (stating that the basic purpose of § 6672 is to "discourage corporations from self-executing government loans using the tax monies they hold in trust"). Specifically, a company cannot use the funds as working capital. Finley, 123 F.3d at 1348. Given this "no excuse" bright-line rule, any non-payment can ordinarily be reasonably attributed to unauthorized misuse of the funds. The Ninth Circuit recognized that this is the ordinary application of Section 6672.4

The existence of a bright-line rule is essential to the application of Section 6672 because, as many courts have recognized, that application -- as in this case -- is often extraordinarily harsh. See Phillips v. United States, 73 F.3d 939, 943-44 (9th Cir. 1996) (stating that the "result is not one we reach with any pleasure . . ." and noting the "Draconian enforcement power which the IRS has under the precedents [the court was] compelled to follow"); Unger v. United States, No. 90 Civ. 0384 (WK), 1994 WL 52574, at *6 (S.D.N.Y. Feb. 17, 1994) ("[i]t is difficult to understand how a rational government could so treat its own citizen"). Courts have recognized that the statute is harsh because the danger at which it is directed is acute.

See, e.g., Carter v. United States, 717 F. Supp. 188, 191 (S.D.N.Y. 1989) ("the statute is harsh, but the danger against which it is directed . . . is an acute one against which, perhaps, only harsh measures are availing.'") (citing Wright v. United States, 809 F.2d 425, 428 (7th Cir. 1987)); see also Stephen J. Vasek, The Hidden Tax Trap of I.R.C. Section 6672, 67 Ky. L.J. 27, 73 (1978) (stating that the "application of [S]ection 6672, as currently interpreted, often imposes a harsh penalty on morally innocent and unsuspecting business managers").

The unique facts and circumstances of this case support a finding of invalidity as applied in connection with the Stabilization Act and extraordinary context. See Lanier, 520 U.S. at 267 (holding that laws must not be vague "either standing alone or as construed"); see also United States v. Nat'l Dairy Prods. Corp., 372 U.S. 29, 36 (1963) (holding that statute should not be tested solely on its face but rather on statute's application to particular conduct that was penalized); see also United States v. Saiermo, 481 U.S. 739, 745 (1987) (recognizing that facial challenge is more difficult to successfully mount than as applied challenge). As discussed below, the Ninth Circuit improperly limited its review to ambiguity in the text of the Stabilization Act. (App., infra, 10a-13a.) Certiorari is warranted to review the clarity of Section 6672, as applied, in context.

 

2. The Stabilization Act Created Ambiguity About What Conduct Was Punishable Under Section 6672.

 

The post-9/11 enactment of the Stabilization Act created ambiguity as to what conduct was punishable under Section 6672. The Stabilization Act provided novel legal relief which permitted the exact conduct that appellate courts ordinarily find punishable as a matter of law under the bright-line test of Section 6672. There is no question that the Stabilization Act permitted the nonpayment of taxes collected knowing they are due, at least temporarily. This is exactly what is clearly prohibited under Section 6672. Plainly stated, the Stabilization Act modified the requirements of responsible persons under Section 6672, with respect to certain tax periods. It was left for responsible persons to review these acts of congress to "steer between lawful and unlawful conduct." See Grayned v. City of Rockford, 408 U.S. 104, 108 (1972).

In analyzing the "willfulness" element of Section 6672, the Ninth Circuit erroneously focused on the wrong statute, only looking at the four corners of the Stabilization Act in an effort to determine its underlying purpose. However, the purpose of the statute that actually imposes a penalty on Nakano, Section 6672, is clear and has already been established by this Court: that purpose is the protection of government revenue. Slodov, 436 U.S. at 248. The Stabilization Act frustrated this purpose by creating uncertainty about Section 6672's bright-line prohibition against use of trust fund taxes for working capital: far from prohibiting payments of this nature, the Stabilization Act actively encouraged airlines to use the funds for this purpose.

In holding that Nakano is liable for Trust Fund Recovery Penalties, the Ninth Circuit erroneously held that the Stabilization Act did not alter the "trust fund" nature of the excise taxes at issue. (App., infra, 2a-3a.) Bound by prior Ninth Circuit precedent, that court and Nakano were forced below to focus on the wrong issue -- the objective legislative intent of the drafters of the Stabilization Act, rather than the reasonableness of Nakano's interpretation of it. Section 6672 requires that a corporate officer's conduct be "willful" but, as interpreted by the Ninth Circuit and the majority of other circuit courts, federal courts may make no inquiry under Section 6672 into the officer's reasonableness or good faith. See supra note 1 and accompanying text.

In contrast, the void-for-vagueness doctrine commands federal courts to examine whether a law is subjectively unclear. Whether a statute is void for vagueness requires a review of the statute from the perspective of a person of ordinary intelligence and contains a reasonableness standard. Groyned, 408 U.S. at 108 (holding that because citizens must be "free to steer between lawful and unlawful conduct, [the Court] insist[s] that laws give the person of ordinary intelligence a reasonable opportunity to know what is prohibited, so that he may act accordingly."). The appropriate test, therefore, is what a person of ordinary intelligence would reasonable understand to be lawful under Section 6672 in light of the Stabilization Act and the unique circumstances that preceded it. The context of the statute at issue, including the legislative history, is clearly relevant to that analysis. See Nat'l Dairy Prods., 372 U.S. at 36 (holding that the statute should not be tested solely on its face but rather on the statute's application to the particular conduct that was penalized).

Persons of ordinary intelligence, including Nakano, reasonably understood the law to encourage use of the collected taxes to pay operating expenses and keep the airlines afloat. Under the Stabilization Act, Congress granted a massive relief package, hastily assembled in the wake of terrorist attacks to keep the airline industry afloat. (App., infra, 55a.) (Representative Don Young, co-sponsor of the House version of the bill, urging colleagues to "focus on the issue of how best to ensure the continued operation of our air transportation system"). The express purpose of the Act was "[t]o preserve the continued viability of the United States air transportation system." (App., infra, 53a.) Representatives of Congress, then-president George W. Bush, and Nakano, all understood the purpose of the Act was to permit airlines to use those funds for other purposes: "I commend Congress for their cooperation and quick action in passing responsible legislation that will improve passenger safety, help the victims and their loves ones, and keep America's airplanes flying while the airlines develop long-term viability plans." See id.; Press Release, The White House, Statement by the President (Sept. 22, 2001) (2001 WL 1111201).

The Ninth Circuit disregarded these stated purposes and instead considered alternative hypothetical and possible purposes not stated in legislative history. (App., infra, 13a) ("There are other reasons, besides freeing funds for daily operating expenses, why Congress could have enacted the [Stabilization Act]. . . . Congress could simply have intended to allow . . ."). But this Court will neither ignore the context in which a law is considered, Nat'l Dairy Prods., 372 U.S. at 36, nor attribute pointless purpose to Congress in absence of facts to the contrary. See United States v. Champlin Ref. Co., 341 U.S. 290, 297 (1951) (holding "[a] statute cannot be divorced from the circumstances existing at the time it was passed").

Further, while the Ninth Circuit focused on the text of the statute and expressly ignored the Stabilization Act's express purpose in the legislative history, this Court is not so decided. This Court does not obviate legislative purpose even where the statutory text is clear. See Church of the Holy Trinity v. United States, 143 U.S. 457, 459 (1982).5 Instead, this Court has held that "even when the plain meaning did not produce absurd results but merely an unreasonable one 'plainly at variance with the policy of the legislation as a whole' this Court has [frequently] followed that purpose, rather than the literal words." United States v. Am. Trucking Ass'ns, 310 U.S. 534, 543 (1940), accord, United States v. Pub. Utils. Comm'n, 345 U.S. 295, 315 (1953).

In this context, Nakano -- and persons of ordinary intelligence -- understood that in light of the Stabilization Act and the extraordinary historical context and act of Congress, that Nakano would not be penalized under Section 6672 for nonpayment of the taxes. Instead, this conduct was encouraged by the government because it was in the government's best interest for the airlines to use those funds to continue operations. Otherwise, the deferral was pointless. See Champlin, 341 U.S. at 298.

As applied to Nakano, Section 6672 is void for vagueness with respect to taxes deferred under the Stabilization Act. The application of Section 6672 penalties under the circumstances violates due process and the penalties are inapplicable under the void for vagueness doctrine. The post-9/11 enactment of the Stabilization Act created ambiguity as to what was unlawful conduct under Section 6672. "Steer[ing] between lawful and unlawful conduct" in this context was impossible due to the vagueness the Stabilization Act created with respect to Section 6672. There was no "reasonable opportunity" for "person[s] of ordinary intelligence" to know what was prohibited so they may act accordingly. See Grayned, 408 U.S. at 108.

 

II. Certiorari Is Warranted To Ensure That Federal Courts

 

Uniformly Enforce The Internal Revenue Code's Protections Of

 

Taxpayers' Collection Due Process Rights.

 

 

The Court should certify this issue to prevent the Commissioner from using a federal statutory shield protecting taxpayers, 26 U.S.C. § 6330 et seq., to be used as a sword to overcome the Commissioner's failure to provide timely notice to Nakano of an $11 million Section 6672 assessment.

Congress has afforded the Commissioner extraordinary powers when he determines that taxes6 are due and owing. The Commissioner makes an "assessment," a formal notation on a taxpayer's account transcript showing an amount due. See 26 U.S.C. § 6203. Following this assessment, a lien arises automatically in favor of the United States over all of the taxpayer's assets, even where the Commissioner fails to provide public notice. 26 U.S.C. § 6321. The Commissioner may file notice of the tax lien to establish priority over third parties, but, in general, federal tax liens enjoy a truly singular priority. 26 U.S.C. § 6323 (providing for priority of the federal tax lien over all but a small group of creditors). In addition, the IRS may collect the amounts at issue by levying upon all of the taxpayer's property, and may do so without any adjudication of the validity of the underlying debt and without consideration of third parties' interests in the property. 26 U.S.C. § 6331. The IRS generally considers itself exempt from state law restrictions on collection and immune from state statutes of limitation regarding collection. 26 U.S.C. § 6334 (providing preemptive federal list of property exempt from levy); Compare United States v. Summerlin, 310 U.S. 414, 416 (1940), with United States v. California, 507 U.S. 746 (1993). In short, the Commissioner holds a privileged place among creditors and possesses "awesome" non-judicial collection powers. Blackston v. United States, 778 F. Supp. 244, 247 (D. Md. 1991).

In light of the non-judicial nature of the Commissioner's authority, Congress has seen fit to enact a series of procedural safeguards for taxpayers subject to the IRS's collection efforts -- safeguards that have only increased over time. In 1954, Congress enacted the precursor of 26 U.S.C. § 6303, which requires the Commissioner to make notice and demand upon the taxpayer prior to attempting to collect unpaid liabilities. See Pub. L. No. 94-455, 68A Stat. 775 (1954). In its modern version, Section 6303(a) mandates that:

 

(a) General rule. . . . the Secretary shall, as soon as practicable, and within 60 days, after the making of an assessment of a tax . . . give notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof.

 

26 U.S.C. § 6303(a) (herein, "Notice and Demand"). Once Notice and Demand is given, the Commissioner is precluded from engaging in any collection activities until after the expiration often days.

 

If any person liable to pay any tax neglects or refuses to pay the same within 10 days after notice and demand, it shall be lawful for the Secretary to collect such tax . . . by levy upon all property . . ."

 

26 U.S.C. § 6331(a). The IRS's failure to comply with statutory requirements of Section 6303 precludes a levy. Howell v. United States, 164 F.3d 523, 525 (10th Cir. 1998) (proper § 6303 notice and demand is required before the Commissioner can exercise his administrative remedies); Security Indus. Ins. Co. v. United States, 830 F.2d 581, 587 (5th Cir. 1987) (the government's failure to notify under § 6303(a) cuts off the government's administrative [lien and levy] and non-judicial remedies); Popky v. United States, 326 F. Supp. 2d 594, 604 (D. Penn. 2004) (before proceeding by levy, the IRS must wait for the expiration of the 10-day period without payment by the taxpayer); Blackston v. United States, 778 F. Supp. 244 (D. Md. 1991) (failure to comply with the § 6303 notice and demand requirements takes away the Commissioner's non-judicial collection powers).

In 1998, finding Section 6303's Notice and Demand and other administrative procedures insufficient to protect taxpayers from abusive collection activities by the IRS, Congress enacted the Internal Revenue Service Restructuring and Reform Act of 1998 ("1998 RRA").7See Pub. L. No. 105-206 § 6330, 112 Stat. 685 (1998). Notably, the 1998 RRA established new procedures providing due process rights to taxpayers when the IRS seeks to collect taxes by levy. See S. Rep. No. 105-174, 67 (1998). The Committee on Finance believed "the IRS should afford taxpayers adequate notice of collection activity and a meaningful hearing before the IRS deprives them of their property." Id. These taxpayer due process rights are now codified at 26 U.S.C. § 6330 et seq.: "Notice and opportunity for hearing before levy."

Specifically, Section 6330(a) requires the Commissioner to notify taxpayers of their right to a hearing before a levy can be made (herein, "Notice of Due Process Rights"). The information required in the notice include:

 

(A) the amount of unpaid tax; (B) the right of the person to request a hearing during the 30-day period under paragraph (2); and (C) the proposed action by the Secretary and the rights of the person with respect to such action, including a brief statement which sets forth -- (i) the provisions of this title relating to levy and sale of property; (ii) the procedures applicable to the levy and sale of property under this title; (iii) the administrative appeals available to the taxpayer with respect to such levy and sale and the procedures relating to such appeals; (iv) the alternatives available to taxpayers which could prevent levy on property (including installment agreements under section 6159); and (v) the provisions of this title and procedures relating to redemption of property and release of liens on property.

 

26 U.S.C. § 6330(a)(3). The Section 6330 Notice of Due Process Rights was never intended to notify taxpayers of an assessment, nor is it a demand for payment. Indeed, the legislative intent behind Section 6330 was to curtail abusive IRS collection actions.

Thus, the Internal Revenue Code mandates that the Commissioner send two separate notices to the taxpayer prior to issuance of any liens or levies -- the Section 6303 notice of demand, within sixty days of assessment, which provides the taxpayer notice of the liability and an opportunity to pay, and the Section 6330 notice, a procedural safeguard offering information regarding administrative review, rather than a demand for payment. See I.R.S. Internal Revenue Manual 5.11.1.2.1 (describing internal procedures for sending these "Required Notices").8 In fact, the IRS itself understands these notices to be separate and distinct, and instructs its agents that the two notices "should not generally be issued simultaneously." Id.

It is undisputed that the Commissioner failed to issue the required Section 6303 notice to Nakano within sixty days of assessment. (App., infra, 24a-25a.) However, the Commissioner seeks to remedy this failure by pointing to its compliance with the entirely separate notice requirement under Section 6330. Contradicting the plain language of the relevant statutes and their purposes, the Ninth Circuit allowed the Commissioner to fulfill both statutory notice requirements by issuing just one Section 6330 notice. (App., infra, 24a-25a.)

While other circuit courts have not yet considered whether a Section 6330 Notice of Due Process Rights can substitute for a Section 6303 Notice and Demand, several agree that the 1998 RRA is intended to protect taxpayers. See Cox v. Comm'r, 514 F.3d 1119, 1124 (10th Cir. 2008) (citing Pub. L. 105-206, 112 Stat. 685 (1998)) ("Section 6330, entitled Notice and opportunity before levy, was added to the Internal Revenue Code as part of the [1998 RRA] as part of Congress' effort to provide taxpayers with more due process protection in connection with IRS collection actions.") (emphasis added); Olsen v. United States, 414 F.3d 144, 150 (1st Cir. 2005) (internal citations omitted) (Section 6330 provides for an advance hearing for taxpayers before the IRS is allowed to levy on property, "in addition to already existing post-deprivation procedures.") (emphasis added); Living Care Alternatives of Utica, Inc. v. United States, 411 F.3d 621, 624 (6th Cir. 2005) (Passage of the 1998 RRA indicates "Congress's intent to provide taxpayers with additional protection in the form of procedures prior to IRS action.") (emphasis added).

Here, the Commissioner asserted, and the Ninth Circuit agreed, that the IRS could fulfill its statutory notice obligations under Section 6303 by serving only the Section 6330 Notice of Due Process Rights.9 (App., infra, 24-25a.) Effectively, the Ninth Circuit allowed the Commissioner to use the due process shield codified by Congress at Section 6330 et seq., as a sword, violating the intent of the 1998 RRA and the Code's overall procedural framework.

In 1998, Congress required the IRS to provide an additional -- not a substitute -- notice to taxpayers under Section 6330, even though the IRS had operated for decades under a requirement to provide Notice and Demand under Section 6303. Congress is presumed to have acted rationally, with full knowledge of the prior Notice and Demand requirement, in enacting Section 6330. If Congress had intended the Section 6330 notice to substitute for the Section 6303 notice, it could have simply enhanced the existing notice requirements under Section 6303. Instead, in an effort to protect taxpayers from the "awesome" non-judicial remedies afforded to the IRS, Congress required two notices, and these notices serve distinct purposes. The Ninth Circuit's permissive approach, conflating the notices and excusing the IRS's failure to follow its own procedural requirements, directly contradicts legislative intent and, if left unchecked, could lead to non-uniform application of the procedural safeguards afforded to taxpayers under the Code among the circuit courts.

 

CONCLUSION

 

 

For the foregoing reasons, the petition for a writ of certiorari should be granted.
Respectfully submitted,

 

 

C. Michael Moore

 

Counsel of Record

 

 

M. Todd Welty

 

Laura L. Gavioli

 

Richard D. Salgado

 

Denise M. Mudigere

 

Dentons US LLP

 

2000 McKinney, Suite 1900

 

Dallas, TX 75201

 

(214) 259-0900

 

c.michael.moore@dentons.com

 

April 21, 2014

 

FOOTNOTES

 

 

1 See, e.g., Davis v. United States, 961 F.2d 867, 875 (9th Cir. 1992) ("the use of after-acquired funds to compensate debtors other than the United States amounts to willfulness."); Conway v. United States, 647 F.3d 228, 234 (5th Cir. 2011) (citing and quoting Logal v. United States, 195 F.3d 229, 232 (5th Cir. 1999)); Colosimo v. United States, 630 F.3d 749, 753 (8th Cir. 2011); Erwin v. United States, 591 F.3d 313, 325 (4th Cir. 2010); Bell v. United States, 355 F.3d 387, 393 (6th Cir. 2004); Thosteson v. United States, 331 F.3d 1294, 1300 (11th Cir. 2003); Greenberg v. United States, 46 F.3d 239, 244 (3d Cir. 1994); Hochstein v. United States, 900 F.2d 543, 548 (2d Cir. 1990); Garsky v. United States, 600 F.2d 86, 91 (7th Cir. 1979). But see Finley v. United States, 123 F.3d 1342 (10th Cir. 1997) (adopting a less restrictive application of the penalty); Godfrey v. United States, 748 F.2d 1568 (Fed. Cir. 1984) (same).

2 Section 6672 originated as the most severe of three criminal tax provisions for failure to pay taxes. The predecessor statute was Section 1308 of the Revenue Act of 1918. Revenue Act of 1918, Ch. 18, § 1308(e), 40 Stat. 1057, 1143). With the reorganization and codification of the Code in 1954, Section 6672 was moved, mostly unchanged, from the criminal provisions because it lacked imprisonment as a punishment. See Mary A. Bedikian, The Pernicious Reach of 26 U.S.C. Section 6672, 13 Va. Tax Rev. 225, 260 (1993). But Congress expressed no intent to change the meaning or application of the law. See H.R. REP. NO. 83-1337 (1954); S. REP. No. 83-1622 (1954).

3 In Giaccio, the Court reasoned as follows:

Both liberty and property are specifically protected by the Fourteenth Amendment against any state deprivation which does not meet the standards of due process, and this protection is not to be avoided by the simple label a State chooses to fasten upon its conduct or its statute. So here this state Act whether labeled "penal" or not must meet the challenge that it is unconstitutionally vague.

Id. at 402.

4 (App., infra, 9a.) ("Ordinarily, excise taxes collected by a carrier on behalf of the government are held in trust, and the funds cannot be used by the carrier for any other purpose.") (emphasis added).

5 The Supreme Court said:

 

It is a familiar rule that a thing may be within the letter of the statute and yet not within the statute, because not within its spirit, nor within the intention of its makers . . . [F]or frequently words of general meaning are used in a statute, words broad enough to include an act in question, and yet a consideration of the whole legislation, or of the circumstances surrounding its enactment, or of the absurd results which follow from giving such broad meaning to the words, makes it unreasonable to believe that the legislator intended to include the particular act.

 

6 The Commissioner assesses and collects the TFRP at issue in the same manner as taxes, and the same procedural protections apply. See 26 U.S.C. §§ 6671, 6672.

7 See 144 Cong. Rec. S7621-05, 39 (1998) WL 376973 ("A long list of procedural due process safeguards are also provided in reaction to IRS collection abuses."); 144 Cong. Rec. H5352-06, 31 (1998), WL 336379 ("[The Internal Revenue Service Restructuring and Reform Act of 1998] also grants increased due process protections in IRS collection actions, including notification and appeals in liens, levies and seizures . . .") (emphasis added).

8 The Internal Revenue Manual is consistent with Congress's intent to protect taxpayers from the extreme non-judicial collection powers it vested in the Commissioner. This Court looks to the Internal Revenue Manual as persuasive authority. Hall v. United States, 132 S.Ct. 1882 (2012); United States v. Boyle, 469 U.S. 241 (1985).

9 In so doing, the Ninth Circuit apparently ignored the clear import of the reforms enacted under the 1998 RRA. The opinion relies on two cases regarding the sufficiency of a Section 6303 notice, Elias v. Connett, 908 F. 2d 521 (9th Cir. 1990) and Hughes v. United States, 953 F.2d 531 (9th Cir. 1992), which were decided prior to the 1998 RRA and the due process rights added therein.

 

END OF FOOTNOTES
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