Former Airline CEO Seeks Review of Decision Holding Him Liable for Trust Fund Taxes

1. Is a responsible person liable as a matter of law for a "willful" violation of 26 U.S.C. § 6672 if funds of a corporation are paid to other creditors with knowledge that federal trust fund taxes are owing?

2. Does a showing that a responsible person made reasonable efforts to protect trust funds, but that those efforts were frustrated by circumstances outside that person's control, or that the responsible person had a reasonable but mistaken understanding of his legal obligations to pay taxes, establish the "reasonable cause" defense to a finding that a responsible person "willfully" failed to pay over trust fund taxes under 26 U.S.C. § 6672?

Respondent is the United States of America.

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2. Conway was one of the founders of National in April 1995. (App., infra, 2a). From that time until National's liquidation in bankruptcy in May 2003, Conway was National's CEO, President, and Chairman of the Board. (App., infra, 2a). Due to liquidity problems following the start-up of the airline, National filed for Chapter 11 bankruptcy protection in December 2000. (App., infra, 2a). At the time of September 11, 2001, National was developing a plan of reorganization. (App., infra, 2a). Conway reasonably believed that National would successfully reorganize. Conway's belief was grounded in experience: at America West Airlines in the early 1990s, Conway was CEO and was responsible in part for what is historically recognized as one of the most successful bankruptcy reorganizations of any airline.²

3. During bankruptcy, National regularly made biweekly payments of the excise taxes it collected in the ordinary course of business. (App., infra, 3a). As a debtor-in-possession operating in Chapter 11, National could only pay day-to-day operating expenses without court approval, pursuant to 11 U.S.C. § 363(c)(1), and as discussed infra at 26. National was required to file monthly operating reports with the Nevada bankruptcy court, detailing National's operating expenditures and financial health.³

Throughout National's bankruptcy, and particularly when National had limited available funds in 2002 prior to its shutdown, Conway relied on National's bankruptcy counsel to advise on what categories of creditors could be paid, and Conway followed counsel's advice.⁴ (App., infra, 39a).

4. The terrorist attacks of September 11, 2001, had a dramatic effect on the aviation industry. In response to that problem, Congress passed the Air Transportation Safety & System Stabilization Act, Pub. L. No. 107-42, 115 Stat. 230 (2001) ("Stabilization Act"). Section 301(a)(1) of the Stabilization Act extended the due date for payment of federal excise taxes to mid-November, and gave the IRS discretion to extend the deferral period to January 15, 2002, which the IRS used. 49 U.S.C. § 40101 (App., infra, 59a); I.R.S. Notice 2001-77, 2001-50 I.R.B. 576, 2001-2 C.B. 576, 2001 WL 1421850 (2001).

5. As discussed infra at 24, this relief was unprecedented. Congress had never before used trust fund taxes as a form of emergency financial assistance. The stated intent of the law was to keep the industry afloat and to allow airlines to use collected excise taxes for operating expenses or working capital. See HOUSE DEBATES, PASSES AIRLINE RELIEF BILL, 2001 TNT 188-46 , Sept. 27, 2001 (App., infra, 61a). Then-President George W. Bush acknowledged that the purpose of deferring payment of the excise taxes was to permit the airlines to use those funds for other purposes:

Representative Don Young, a co-sponsor of the Stabilization Act, explained that

6. Following the passage of the Stabilization Act, National did as Congress and the President intended: National used the deferred excise tax amounts collected for the third and fourth quarters of 2001 as working capital during the months immediately following September 11, 2001. Throughout the excise tax deferral period and when the taxes became due in January 2002, Petitioner sought advice from National's bankruptcy counsel regarding whether the excise taxes could be paid and how to respond to the IRS's January deadline. Petitioner followed counsel's advice not to pay but instead to request an extension of time for payment.⁵ In January 2002, when the taxes for the third and fourth quarter of 2001 became due, National filed excise tax returns and requested a six-month extension for payment. (App., infra, 3a).

7. In March 2002, while the excise taxes at issue were due and owing, the Nevada bankruptcy court overseeing National's case approved its Plan of Reorganization in Chapter 11.⁶ The Plan provided for payment of all past-due federal excise taxes.⁷ The IRS did not object to the Plan.⁸ The reorganization depended upon loan guarantees from the Air Transportation Stabilization Board, in a program established under the Stabilization Act; National had secured Foothill Capital as the loan guarantor.⁹ Between January 2002 and November 2002, National continued to file its monthly operating reports with the Nevada bankruptcy court, showing that the excise taxes at issue were past due and that National was continuing to operate as a debtor-in-possession under Chapter 11.¹⁰ The IRS was also kept informed of the status of these taxes and National's efforts to pay them.¹¹ (App., infra, 27a, 39a).

8. Following the approval of National's Plan of Reorganization, Conway and National strove to successfully reorganize. National applied for funding from the Air Transportation Stabilization Board, but that funding was denied in August 2002.¹² When Conway and National's board were unable to obtain alternative financing, despite their best efforts, on November 6, 2002, National was constrained to shut down all operations. (App., infra, 3a). On May 7, 2003, National's bankruptcy was converted to Chapter 7. (App., infra, 3a).

9. In the months leading up to the shut-down, Conway routinely consulted with National's bankruptcy counsel to determine what types of payments were essential in the event the company had to cease operations.¹³ (App., infra, 27a-28a). National's bankruptcy counsel never included the excise taxes for the third and fourth quarters of 2001 among these payments. (App., infra, 27a-28a). Following counsel's advice, National did not pay the excise taxes for the third and fourth quarters of 2001 when the company shut down. These taxes also were not paid during National's liquidation, after Petitioner left the company.

10. In 2008, Conway commenced a timely action for refund and abatement of taxes by filing a complaint in the United States District Court for the Eastern District of Texas. The Government counter-claimed for the balance due. After discovery, and upon the Government's motion, the Magistrate Judge recommended that the district court grant summary judgment in favor of the Government and dismiss Conway's claims. (App., infra, 19a). Conway objected to the Magistrate Judge's report and recommendation on numerous grounds. Upon adopting the report and recommendations of the Magistrate Judge, the district court entered a final judgment in favor of the Government on April 5, 2010. (App., infra, 16a).

11. Conway timely appealed the judgment to the United States Court of Appeals for the Fifth Circuit. (App., infra, 4a). The Court of Appeals affirmed the district court's judgment and subsequently denied a petition for panel rehearing. (App., infra, 15a, 51a). Among other things, the Court of Appeals held that the deferral provisions of the Stabilization Act did not excuse the non-payment and that Conway's conduct was willful as a matter of law under the statute. (App., infra, 13a). The Court of Appeals declined to examine the legislative history of the Stabilization Act. (App., infra, 13a). The Court of Appeals further held that Petitioner's willfulness had been established as a matter of law simply because payments to other creditors had been made while Conway knew the tax deficiency was due. (App., infra, 12a).

12. The Section 6672 penalty is intended as a collection device,¹⁴ but there is little to nothing for the IRS to collect from Petitioner. The penalty assessment, including accrued interest, stood at roughly $11.5 million in September 2011. Petitioner's salary during his entire tenure at National was a fraction of this amount. Petitioner is 66 years old, and his current net worth is believed to be under $100,000.

A. The Current Appellate Standard Functionally Results in Strict Liability, Contrary to This Court's Precedent.

In Slodov v. United States, 436 U.S. 238 (1978), this Court established standards for willfulness under Section 6672¹⁵ that the Fifth Circuit did not follow in Petitioner's case. In Slodov, a corporate officer acquired the assets of a struggling business with knowledge that the corporation had outstanding trust-fund tax debts. Id. at 241-42. Based on the prior management's representation that there were sufficient funds in the corporate accounts to pay the debt, the officer assumed the obligations of the company in the purchase. Id. Later, the officer learned that the corporation had no assets to pay the past-due taxes. Id. The officer then raised funds, including his personal funds, to continue operating the business. Id. at 242. He used these funds not to pay the past-due taxes but to pay ongoing operating expenses. Id. Ultimately the effort failed, and the corporation liquidated in bankruptcy with the trust fund taxes unpaid. Id. at 243.

Finding that Slodov's conduct was not willful,¹⁶ the Court held in relevant part:

In silent disregard of Slodov, the majority of appellate courts to consider the question, including the Fifth Circuit in this case, have held that it is "willful" under Section 6672 as a matter of law to pay other creditors with knowledge that federal trust fund taxes are owing, without first paying such taxes. These appellate courts have not given proper weight to extenuating facts and circumstances in particular cases. In the Fifth Circuit, willfulness under Section 6672 is established as a matter of law if the corporate officer "knows the taxes are due but uses corporate funds to pay other creditors." Logal v. United States, 195 F.3d 229, 232 (5th Cir. 1999).¹⁷ On the other hand, the First Circuit holds that three factual scenarios satisfy the willfulness standard, including continuing to pay other creditors without making reasonable inquiry regarding trust fund taxes. Vinick v. Commissioner, 110 F.3d 168, 173 (1st Cir. 1997). The Second Circuit has used a standard similar to the Fifth Circuit; for example, in Hochstein v. United States, 900 F.2d 543, 548 (2d Cir. 1990), the court held that the district court should have found a corporate officer willful as a matter of law because he paid "other creditors with knowledge that withholding taxes are due." The Third Circuit has held that "[a]ny payment to other creditors, including the payment of net wages to the corporation's employees, with knowledge that the employment taxes are due and owing to the Government, constitutes a willful failure to pay taxes." Greenberg v. United States, 46 F.3d 239, 244 (3d Cir. 1994). In the Fourth Circuit, a "responsible person's intentional preference for creditors other than the United States establishes willfulness as a matter of law[.]" Erwin v. United States, 591 F.3d 313, 325 (4th Cir. 2010). Similarly, in the Sixth Circuit, "all that is necessary to demonstrate willfulness is the existence of an intentional act to pay other creditors before the federal government." Bell v. United States, 355 F.3d 387, 393 (6th Cir. 2004). In Garsky v. United States, 600 F.2d 86, 91 (7th Cir. 1979), the Seventh Circuit held that a "responsible person's use of funds, or his knowledge of the use of funds for payments to other creditors after he is aware of the failure to pay the withholding tax, is willful conduct within the scope of Section 6672." The Eighth Circuit recently reaffirmed its use of the standard, holding that "[w]illfulness is generally a question of fact, but if a responsible person knew of payments to other creditors after he was aware of the failure to pay over withholding taxes to the government, his actions are willful as a matter of law." Colosimo v. United States, 630 F.3d 749, 753 (8th Cir. 2011). In Davis v. United States, 961 F.2d 867, 875 (9th Cir. 1992), the Ninth Circuit stated that "the use of after-acquired funds to compensate debtors other than the United States amounts to willfulness[.]"¹⁸ In the Eleventh Circuit, the "willfulness requirement of § 6672 is satisfied if the responsible person has knowledge of payments to other creditors after he becomes aware of the failure to remit the withholding taxes[.]" Thosteson v. United States, 331 F.3d 1294, 1300 (11th Cir. 2003). On the other hand, the Tenth Circuit and Federal Circuit have adopted less restrictive interpretations of the willfulness requirement.¹⁹See Finley v. United States, 123 F.3d 1342 (10th Cir. 1997); Godfrey v. United States, 748 F.2d 1568 (Fed. Cir. 1984).

The rule is applied routinely by federal courts, even when these courts acknowledge that the outcome is "harsh" or "draconian," and even when the corporate officer's situation is a "sympathetic" one.²⁰ Some courts observe that, although it is harsh to apply the standard under the circumstances, they are compelled to follow prior case law precedent.²¹ In Petitioner's case, both the magistrate judge and one of the judges hearing the case in the Fifth Circuit observed similarly.²²

Despite the near universal use of the "payment to others" rule by the federal courts, this rule is not found in this Court's precedent.²³ To the contrary, Slodov involved a case that technically violated this rule. As discussed infra at 21, the Tenth Circuit has adopted a "reasonable cause" defense which permits federal courts to consider extenuating facts and circumstances, and preserves a role for the fact-finder in Section 6672 cases.

B. Section 6672 Originated as a Criminal Penalty, but its Willfulness Standard Is Inconsistent with Federal Criminal Tax Standards and Federal Civil Penalty Standards.

The willfulness standard used by appellate courts under Section 6672 is particularly severe in light of the willfulness standards employed in two related contexts -- other federal civil penalties and federal tax crimes. Recently, in Safeco Ins. Co. of Am. v. Burr, 551 U.S. 47, 56-60 (2007), the Court reviewed its jurisprudence interpreting "willfulness" in the context of a federal civil penalty statute, 15 U.S.C. § 1681n(a) of the Fair Credit Reporting Act. The statute penalized companies for "willfully failing to comply" with the Act, but did not contain a statutory definition of the term "willfully."²⁴Id. The Court held that "where willfulness is a statutory condition of civil liability, we have generally taken it to cover not only knowing violations of a standard, but reckless ones as well[.]" Id. at 57 (citing McLaughlin v. Richland Shoe Co., 486 U.S. 128, 132-33 (1988); Trans World Airlines, Inc. v. Thurston, 469 U.S. 111, 125-26 (1985)). The Court reasoned that this standard "reflects common law usage, which treated actions in 'reckless disregard' of the law as 'willful' violations." Id. (citations omitted). Under Burr, unlike the appellate willfulness standards applying Section 6672, no single factual scenario automatically merits a finding of liability.

Moreover, under federal criminal tax statutes an officer may offer a defense that the law was complex and that he suffered from a reasonable but incorrect understanding of his responsibilities. As the Court held in Cheek v. United States, 498 U.S. 192, 201-02 (1991):

The standards for willfulness in the criminal tax arena are instructive because Section 6672 originated as a criminal statute. The predecessor statute was Section 1308 of the Revenue Act of 1918, and it was the third tier of a three-tier scale of criminal sanctions for failure to pay federal taxes.²⁶ That statute imposed the 100% penalty against any "'person who willfully refuses to pay, collect or truly account for and pay over any such tax[,]'" language similar to the current Section 6672.²⁷ The 100% penalty was a criminal sanction until the reorganization of the Internal Revenue Code of 1954, where it was moved, mostly unchanged, into the subpart of the Code dealing with civil "Assessable Penalties."²⁸ This is where the statute remains today. Although the penalty was moved to a civil section of the Code, Congress demonstrated no intent to change the meaning of Section 6672.²⁹ Commentators have observed that the use of a former criminal statute in the civil context has resulted in virtually strict liability under Section 6672.³⁰

C. Circuit Courts Have Lessened the Harshness of the Willfulness Standard through the Reasonable Cause Defense, but, in the Fifth Circuit, the Defense Is Largely Theoretical.

Willfulness should not be established as a matter of law through the mechanical application of a rule not found in this Court's jurisprudence. Instead, federal courts evaluating Section 6672 cases should be directed to consider all of the facts and circumstances of an individual case, finding no factual scenario legally conclusive of an officer's willfulness.

In Finley v. United States, 123 F.3d 1342, 1348 (10th Cir. 1997), the Tenth Circuit Court of Appeals 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[.]"³¹ 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). Other circuits have either expressly rejected the availability of the defense³² or have not weighed in on the issue.³³

As in the case below, the Fifth Circuit pays lip service to the "reasonable cause" defense but has never applied it in any case.³⁴ In the Fifth Circuit, the term "reasonable cause" has been interpreted to include 1) "advice by counsel under certain circumstances not to pay the withheld taxes as they became due;" 2) "advice of non-collection by attorney and tax collector;" and 3) "advice by counsel that there was no tax liability."³⁵ In the Newsome case, where this interpretation was first announced, the court held that the defense did not apply because the officer had not been advised that he could pay other creditors instead of paying taxes.³⁶ Moreover, the Fifth Circuit has rejected the reasonable cause defense of advice of counsel in other cases, including the present one.³⁷

D. Only the Tenth Circuit Applies a Reasonable Cause Standard under Section 6672 that Is Consistent with Slodov.

The Court should grant the Petition to resolve the split in the Circuit Courts and prevent the Fifth Circuit and other courts from applying Section 6672 as a strict liability statute. Without recourse to a reasonable cause defense, corporate officers effectively face strict liability under Section 6672, even in unusual and equitable circumstances like this one where payments to other creditors were supported by legal advice and Congressional directive.

Petitioner contends that either the reasonable cause standard announced by the Tenth Circuit in Finley or the defenses to willfulness announced by this Court in Cheek would implement the standard of willfulness in Slodov. Under Finley, a corporate officer may demonstrate reasonable cause by showing that he or she made reasonable efforts to protect the trust funds, but that those efforts were frustrated by circumstances outside the officer's control.³⁸ Under Cheek, liability is established only if the corporate officer intentionally violated a known legal duty, and was not suffering from a reasonable misapprehension of applicable law.³⁹ Under either standard, following this Court's precedent in Slodov, no single factual scenario would automatically establish willfulness, but instead all of the facts and circumstances of the case would be considered.

The evidence below created a genuine issue of fact regarding whether Conway acted reasonably, and not willfully, to safeguard National's federal excise taxes. Applying the proper reasonable cause standard to this case would have resulted in a reversal of the district court and a trial on the merits.

E. The Stabilization Act Provided a Novel Form of Relief, and Petitioner Acted Reasonably in Light of Its Provisions.

Prior to 2001, Congress and the IRS had afforded disaster relief for tax deadlines, but not industry-wide and not affecting trust fund taxes.⁴⁰ In 1997, Congress enacted 26 U.S.C. § 7508A,⁴¹ authorizing the IRS to defer certain filing and payment deadlines for taxpayers in Presidentially-declared disaster areas. In 2001, Section 7508A only empowered the IRS to defer income, estate, or gift tax payments, not trust fund tax payments, and only authorized deferrals up to 120 days.⁴²

In 2002 and 2005, following September 11 and the Katrina disaster, respectively, Congress substantially broadened the IRS's authority under Section 7508A, increasing the possible deferral window to one year,⁴³ and authorizing deferrals of employment and excise tax payments and filings.⁴⁴ The IRS has now used this authority to defer employment and excise taxes in disaster situations.⁴⁵ Although the IRS has now granted trust fund tax deferrals in several emergency situations, this was a novel action in 2001. Trust fund tax deferrals now could potentially impact thousands of taxpayers across the country.

In Petitioner's case, the excise tax deferral had profound consequences for National's and Petitioner's ability to pay the taxes at issue. Because National was operating as a debtor-in-possession in Chapter 11 bankruptcy, National and Conway could not pay extraordinary debts without court approval.⁴⁶ None of the tax liabilities at issue qualified as payments which National could have made in the ordinary course of business under 11 U.S.C. § 363(c)(1).⁴⁷ By deferring the payment date for excise taxes for the third and fourth quarter of 2001 to January 2002, the Stabilization Act and related IRS Notices called for payment of these taxes in a lump sum. However, a lump-sum tax payment would have been contrary to applicable Treasury Regulations⁴⁸ and outside of National's prior business practice.⁴⁹ The Stabilization Act provided novel legal relief, and Conway sought advice from National's bankruptcy counsel on the deferred excise tax payments.⁵⁰ Petitioner received advice not to pay on the deferral deadline, but to request a further extension of time to pay.⁵¹

In attempting to simultaneously comply with the Stabilization Act, the ordinary guidelines for payment of excise taxes under Treasury Regulations,⁵² and Chapter 11's bankruptcy rules,⁵³ Petitioner faced a series of complex legal restrictions regarding payment of the excise taxes at issue. He reasonably sought, received, and followed advice not to pay under these conditions.⁵⁴ Therefore, there was, at a minimum, a disputed issue of fact as to whether Petitioner's actions were "willful" under Section 6672.

In general, the Internal Revenue Service insists that it must be the first creditor paid before all others, and a significant body of appellate jurisprudence supports that position.⁵⁵ However, Congress' enactment of trust fund tax deferrals for disaster relief is an acknowledgment that taxpayers may pay other creditors during the deferral period, before taxes are paid.⁵⁶ The conduct that the Courts of Appeals find willful as a matter of law -- payment of other creditors while trust-fund taxes are unpaid -- is precisely the conduct sanctioned by Congress' excise tax deferral under the Stabilization Act. These two positions are in irreconcilable conflict, and Petitioner's conduct simply could not be willful under this factual scenario.

The harsh results observed by many federal jurists under Section 6672 are deeply felt in Petitioner's case. While Conway faces a multi-million dollar judgment, he has little to nothing to satisfy it. The Government has been able to establish without dispute that National paid other debts while the excise taxes at issue were pending, but has never satisfactorily answered the question of how Petitioner acted knowingly, recklessly, or intentionally under Section 6672. To the contrary, Petitioner surrounded himself with qualified professionals and followed their advice in complex legal circumstances, all during an extraordinary time for National, the airline industry as a whole, and this country. National had a reasonable and obtainable plan for repayment of these excise taxes, the majority of which accrued under the Stabilization Act's emergency deferral period. Despite the repayment plan's approval by the Nevada bankruptcy court and support by National's board and bankruptcy counsel, that plan ultimately did not come to fruition. Federal courts should not be constrained to ignore unique circumstances like the ones that Petitioner's case presents, and Section 6672 should be given a fair construction to do substantial justice.

For the foregoing reasons, the Petition for a Writ of Certiorari should be granted.

² Rodney Dalton, United Better In Red Than Dead, The Australian, Dec. 11, 2002, at 39 ("Since deregulation of the industry in 1978, only Continental and America West have survived from among the 11 major airlines to have gone bankrupt -- including TWA three times").

³See, e.g., In re National Airlines, Inc., No. 00-19258 (Bankr. D. Nev.), Rec. Doc. Nos. 858, 977, 1022, 1092, 1133, 1185, 1186, 1223. This fact is not mentioned in the opinions below, but this was undisputed and is a matter of public record.

⁴ The advice Petitioner received during National's bankruptcy was a disputed issue below and is an extenuating circumstance in this case. The Fifth Circuit and district court erroneously discounted Petitioner's evidence regarding the advice he received. At summary judgment, all inferences were to be drawn in Petitioner's favor. See Olabisiomotosho v. City of Houston, 185 F.3d 521, 525 (5th Cir. 1999).

⁵See supra note 4.

⁶In re National Airlines, Inc., No. 00-19258 (Bankr. D. Nev.), Rec. Doc. No. 808-2 and 1037. This fact is not mentioned in the opinions below, but this was undisputed and is a matter of public record.

⁷In re National Airlines, Inc., No. 00-19258 (Bankr. D. Nev.), Rec. Doc. No. 808-2 at Section 3.2, p. 12 (providing that all administrative claims and tax claims would be paid).

⁸In re National Airlines, Inc., No. 00-19258 (Bankr. D. Nev.), Rec. Doc. No. 1037 at 3-4.

⁹Id. at 9-10.

¹⁰See supra note 3.

¹¹ Prior to National's shutdown, the IRS never advised Conway that personal liability would attach if the taxes remained unpaid.

¹² While this was not mentioned in the opinions below, it is a matter of public record. National Airlines Closes After Financing Falls Through, N.Y. Times, Nov. 7, 2002, at C4.

¹³See supra note 4.

¹⁴See Gens v. United States, 615 F.2d 1335, 1339 n.5 (Ct. Cl. 1980) (citing and quoting Internal Revenue Manual, Policy Statement P-5-60, MT 1218-56 (Feb. 25, 1976) (providing that the "100-percent penalty . . . will only be used as a collection device")).

¹⁵ Section 6672 reads in pertinent part:

¹⁷See also Conway v. United States, 647 F.3d at 234 (App., infra, at 8a) (citing and quoting Logal, 195 F.3d at 232); Barnett v. IRS, 988 F.2d 1449, 1457 (5th Cir. 1993) (holding similarly); Howard v. United States, 711 F.2d 729, 736 (5th Cir. 1983) (holding similarly).

¹⁸ The Ninth Circuit expressly declined to extend Slodov's reasoning to the petitioner in Davis because prior appellate decisions mandated a finding of willfulness where the corporation had made payments to other creditors. Id.

¹⁹See infra at 23 for further discussion of the Tenth Circuit standard. The Federal Circuit has employed several different willfulness tests; as shown in Godfrey, that court evaluates the "personal fault" of the corporate officer in addition to evaluating whether payments to other creditors were made. See Godfrey, 748 F.2d at 1576-79.

²⁰See, e.g., Bradshaw v. United States, 83 F.3d 1175, 1181 (10th Cir. 1996) (finding that the options the officer faced were "harsh," and so was the statute); United States v. Rem, 38 F.3d 634, 647 (2d Cir. 1994) (recognizing the "potentially inappropriate harshness" of the statutory remedy); Wright v. United States, 809 F.2d 425, 428 (7th Cir. 1987) (observing that the statute is "harsh"); 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. . . . A jury could find, however, that under the Draconian enforcement power which the IRS has under the precedents we are compelled to follow, [the officer] recklessly disregarded his tax responsibility"); Brown v. United States, 769 F.Supp.2d 1355, 1363 (M.D. Fla. 2011) (noting that the "Court is sympathetic to [the officer's] circumstances").

²¹See, e.g., Smith v. United States, 555 F.3d 1158, 1165 (10th Cir. 2009) (stating "[a]lthough the result here appears harsh, the statute at issue, and the line of cases from our circuit interpreting that statute, require us to affirm"); Lubetzky v. United States, 393 F.3d 76, 81 (1st Cir. 2004) (observing that the corporate officer faced a "harsh dilemma" but that case law was favorable to the government); Denbo v. United States, 988 F.2d 1029, 1035 (10th Cir. 1993) (holding that the "consequence of imposing section 6672 liability on taxpayers is often harsh. Nonetheless, we are bound to follow the law"); Howard v. United States, 711 F.2d 729, 737 (5th Cir. 1983) (holding that "[a]lthough we recognize that our holding today may appear harsh to some, we are bound to follow the law as interpreted by the Supreme Court and this Circuit"); Unger v. United States, No. 90 Civ. 0384 (WK), 1994 WL 52574, at *6 (S.D.N.Y. Feb. 17, 1994) (holding that it was compelled to find liability under prior case law, even though "[i]t is difficult to understand how a rational government could so treat its own citizen").

²²See (App., infra, 49a) (stating that the "Court is not unsympathetic to Conway's plight. What transpired on his watch was the 'Perfect Storm.'"). During oral argument in this case, one judge on the Fifth Circuit panel noted that "your problem is you're running up against tough case law."

²³ Some commentators have suggested that this 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. 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." 436 U.S. at 254; see Bedikian, supra, at 264; Hungerford, supra, at 460.

²⁴ Section 6672 similarly contains no definition of this term. As the Court observed, "a common law term in a statute comes with a common law meaning, absent anything pointing another way." Id. at 58.

²⁵Id. at 205 (citing and quoting United States v. Bishop, 412 U.S. 346, 360-61 (1973) (further citations omitted)). See also Ratzlaf v. United States, 510 U.S. 135 (1994) (applying a similar willfulness standard to currency structuring crime under Title 31).

²⁶See Bedikian, supra note 23, for a more thorough discussion of the statute's legislative history.

²⁷Id. at n.28 (quoting Revenue Act of 1918, Ch. 18, § 1308(e), 40 Stat. 1057, 1143). See 26 U.S.C. § 6672 (stating "any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof. . . .").

²⁸Id. at 233-35; Internal Revenue Code of 1954, Ch. 736, 68A Stat. 1.

²⁹See H.R. REP. No. 83-1337 (1954); S. REP. No. 83-1622 (1954).

³⁰See Bedikian, supra note 23, at 260 ("Willfulness, at least in the civil context, became a virtual substitute for strict liability"); Corrie Lynn Lyle, Note, The Wrath of I.R.C. § 6672: The Renewed Call for Change -- Is Anyone Listening? If You Are a Corporate Official, You Had Better Be, 74 S. Cal. L. Rev. 1133, 1146 (2001) (observing that the "statute is not grounded in reality" and results in injustice in too many cases); Burgess J.W. Raby and William L. Raby, Trust Fund Penalties and Reasonable Cause, 2004 Tax Notes Today 19-11 (Jan. 29, 2004) (noting that numerous courts take a "strict liability" view of the statute). See also Fowler v. United States, 820 F.Supp. 1390, 1395 n.2 (D. Wyo. 1993) ("Section 6672 is not a strict liability statute, although after reviewing the case law, one might believe otherwise").

³¹ The court 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.

³²See Anuforo v. Commissioner, 614 F.3d 799, 808 (8th Cir. 2010) (holding reasonable cause was not recognized as a defense); Buffalow v. United States, 109 F.3d 570, 573 (9th Cir. 1997) (holding that conduct motivated by reasonable cause may still be willful); Harrington v. United States, 504 F.2d 1306, 1315-16(1st Cir. 1974) (holding no reasonable cause defense existed).

³³See Bell v. United States, 355 F.3d 387, 398 n.8 (6th Cir. 2004) (declining to rule on whether reasonable cause was a defense under facts of case); Thosteson v. United States, 331 F.3d 1294, 1301 (11th Cir. 2003) (same); Wall v. United States, 592 F.2d 154, 163 (3d Cir. 1979) (same).

³⁴See, e.g., Bowen v. United States, 836 F.2d 965, 968 (5th Cir. 1988) ("although we have recognized conceptually that a reasonable cause may militate against a finding of willfulness, no taxpayer has yet carried that pail up the hill"). The Fifth Circuit first recognized the defense in Frazier v. United States, 304 F.2d 528, 529-30 (5th Cir. 1962), holding it was part of the test for willfulness but was not present in that case.

³⁵Newsome v. United States, 431 F.2d 742, 748 n.12 (5th Cir. 1970) (internal citations omitted).

³⁶Id. at 747-48. In this case, Conway was advised to pay other creditors instead of the federal government.

³⁷See, e.g., Cash v. Campbell, 346 F.2d 670, 672-73 (5th Cir. 1965) (holding advice of counsel defense insufficient because attorney did not advise officer not to pay taxes as they came due). Under the Cash and Newsome cases, the Fifth Circuit held advice-of-counsel defenses insufficient because the officers could not show that counsel had advised them not to pay the taxes at issue. See Newsome, 431 F.2d at 748 n.12; Cash, 346 F.2d at 672-73. In this case, Petitioner offered that exact defense, and the Fifth Circuit rejected it.

³⁸See supra at 21.

³⁹See supra at 18-19.

⁴⁰ Prior to September 11, 2001, the IRS had granted deadline deferrals for certain disaster areas. I.R.S. Notice 97-62, 1997-49 I.R.B. 8, 1997-2 C.B. 320, 1997 WL 728088 (1997); I.R.S. Notice 2001-30, 2001-14 I.R.B. 989, 2001-1 C.B. 989, 2001 WL 259244 (2001). However, these deferrals affected income tax payments and not withholding taxes subject to personal liability under 26 U.S.C. § 6672.

⁴¹ Taxpayer Relief Act of 1997, Pub. L. 105-34 § 911, 111 Stat. 788 (1997).

⁴²See Economic Growth & Tax Relief Reconciliation Act of 2001, Pub. L. 107-16 § 802(a), 115 Stat. 38 (2001) (extending the deferral time under Section 7508A temporarily to 120 days from 90 days). Also, Section 7508A allows the IRS to postpone any of the acts listed in Section 7508. In 2001, Section 7508(a)(1)(A-B) provided that the IRS could postpone filing and payment of "income, estate, or gift tax" but not withholding obligations. Also, under 26 U.S.C. §§ 6081 and 6161 in 2001, the IRS was empowered to postpone filing and payment of taxes for up to six months, but this was done on a case-by-case basis when a taxpayer filed the appropriate requests for extension. Both statutes apply only when certain requirements are met. See Treas. Reg. §§ 1.6081-3; 1.6081-4(a)(1) (individuals); Treas. Reg. § 1.6081-3(a)(1)-(4) (corporations). Similarly, the extension of time for paying tax or deficiency "may be granted . . . at the request of the taxpayer," through an application made on Form 1127, and accompanied by evidence showing the undue hardship that would result to the taxpayer if the extension were refused. Treas. Reg. § 1.6161-1(a) and (c).

⁴³ Victims of Terrorism Tax Relief Act of 2001, Pub. L. 107-134, 115 Stat. 2427 § 112(a) (2002).

⁴⁴ Katrina Emergency Tax Relief Act of 2005, Pub. L. 109-73, 119 Stat. 2016 § 403(a) (2005) (amending Section 7508(a)(1)(A-B)).

⁴⁵ I.R.S. Notice 2006-20, 2006-10 I.R.B. 560, 2006-1 C.B. 560, 2006 WL 366923 (2006); I.R.S. Notice 2005-66, 2005-40, I.R.B. 620, 2005-2 C.B. 620, 2005 WL 2175177 (2005).

⁴⁶ 11 U.S.C. §§ 363(b)(1) and (c)(1). See also 2 William L. Norton, Jr., Norton Bankr. L. & Prac. 3d §§ 44.15 and 44.16 (2008) (explaining that the debtor or trustee may not make non-ordinary-course payments without court approval and giving tests for same).

⁴⁷ That statute provides in relevant part:

⁴⁸ Treas. Reg. §§ 40.6302(c)-1 and 40.6302(c)-3 provide that semi-monthly deposits are required and provide for calculation of the amounts due under the "alternative method."

⁴⁹ (App., infra, 3a). The Fifth Circuit quoted Nevada Local Bankruptcy Rule 960, which at the time provided that taxes should be timely paid while a debtor operated in Chapter 11. (App., infra, 7a). However, a local court rule cannot upset the priority rules established in the Bankruptcy Code by Congress. The amended local rule, currently in effect, recognizes this:

⁵⁰See supra note 4.

⁵¹See id.

⁵² Treas. Reg. §§ 40.6302(c)-1 and 40.6302(c)-3.

⁵³ 11 U.S.C. § 363(c)(1).

⁵⁴See supra note 4.

⁵⁵See supra note 17.

⁵⁶ This purpose is evident from the Stabilization Act's legislative history. See supra at 4-6. The Court of Appeals' refusal to consider this history -- and its observation that the commentary possibly applied to some other portion of the Act -- ignores the obvious practical implications of the deferral. (App., infra, 13a). It logically follows that Congress deferred the airlines' excise taxes so that the airlines could use these taxes as working capital during the deferral period. No other purpose is apparent. The Government's position, adopted by the Fifth Circuit, presupposes that, during the deferral period, airlines were not permitted to make payments to anyone before the IRS -- for example, not for airplane fuel and not for pilots' and mechanics' wages. Essentially, the airlines could not conduct business until their excise taxes were paid. However, this Court has held that trust fund taxes do not require special segregation from other funds. See Begier v. IRS, 496 U.S. 53, 61-62 (1990) (holding trust was created regardless of existence of segregated fund). These taxes can be in a company's general operating fund, along with amounts which cover a company's ordinary expenses. The purpose of the deferral, to provide operating capital for airlines, may not have been expressly stated in the statute, but it was logical based on the nature of the relief.