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Byrne v. United States

United States Court of Appeals, Sixth Circuit

May 15, 2017

Roger Byrne, Plaintiff-Appellant,
United States of America, Defendant-Appellee, Eric C. Kus, Counterclaim Defendant-Appellant.

          Argued: December 8, 2016

         Appeal from the United States District Court for the Eastern District of Michigan at Detroit. No. 2:06-cv-12179-Arthur J. Tarnow, District Judge.


          Randolph T. Barker, BERRY MOORMAN P.C., Detroit, Michigan for Appellant Byrne. Scott R. Murphy, BARNES & THORNBURG LLP, Grand Rapids, Michigan, for Appellant

          Kus. Ivan C. Dale, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.

         ON BRIEF:

          Randolph T. Barker, BERRY MOORMAN P.C., Detroit, Michigan, Scott R. Murphy, BARNES & THORNBURG LLP, Grand Rapids, Michigan, for Appellants.

          Ivan C. Dale, Jonathan S. Cohen, UNITED STATES DEPARTMENT OF JUSTICE, Washington, D.C., for Appellee.

          Before: BATCHELDER, STRANCH, and DONALD, Circuit Judges.


          ALICE M. BATCHELDER, Circuit Judge.

         The Internal Revenue Code, 26 U.S.C. § 6672, permits the United States to recover unpaid trust-fund taxes[1] from persons responsible for paying those taxes, if they willfully failed to pay them. We have previously held that Appellants Roger Byrne and Eric Kus, as president and CEO, respectively, of Eagle Trim, Inc. ("Eagle Trim") were responsible for paying Eagle Trim's trust-fund taxes, but we remanded on the question of whether their failure to pay those taxes was willful. On remand, the district court conducted a bench trial and determined that Byrne and Kus willfully failed to pay Eagle Trim's trust-fund taxes by recklessly disregarding the risk that the taxes were not being paid. Byrne and Kus appeal the entry of judgment, which assigned Byrne a liability of $533, 213.42 and Kus a liability of $533, 204.37.

         After a review of the record and a clarification of what constitutes reckless conduct for purposes of § 6672(a), we conclude that Byrne and Kus did not willfully fail to pay Eagle Trim's trust-fund taxes. Accordingly, we vacate the district court's judgment and remand for further proceedings not inconsistent with this opinion.

         I. BACKGROUND

         In 1998, Eagle Picher Corporation, a large manufacturing concern, owned a division that produced interior-trim parts for automobiles. The trim division's factory was located in Kalkaska, Michigan, where hundreds of employees worked in manufacturing and in administration. Eagle Picher's trim division also had a sales office in the Detroit area, 250 miles to the southeast of Kalkaska. Eagle Picher put its trim division up for sale in 1998.

         Eric Kus and Gary Anderson assembled a small group of investors, including Roger Byrne and Bernard Fuller, to buy Eagle Picher's trim division. They negotiated a $15 million purchase price with Eagle Picher and a financing package with General Motors Acceptance Corporation Business Credit LLC ("GMAC"), closing the deal on October 31, 1998. The investors created Eagle Trim to operate the new venture, and Eagle Land Holdings, LLC as a holding company for the real estate. Kus became the chairman and chief executive officer of Eagle Trim upon its formation. Byrne served as the president of Eagle Trim, and Fuller became the controller.

         Part of the financing package was a revolving line of credit provided by GMAC to Eagle Trim, the maximum amount of which was calculated based on the company's current accounts receivable and inventory, secured by a lien on all of Eagle Trim's assets. Eagle Trim borrowed money against the line of credit to pay operating expenses, including trust-fund taxes. The financing agreement gave GMAC the right to have an accounting firm of its choice examine Eagle Trim's business records on a periodic basis, and GMAC exercised this right. GMAC used different firms to conduct these examinations, called "collateral reviews, " including Lender Services and Iannuzzi & Darling, LLC. The findings of the collateral reviews were provided directly to GMAC, but they were not routinely shared with Eagle Trim.[2]

         The GMAC financing agreement also required Eagle Trim to provide GMAC with annual financial statements audited by an independent accounting firm. Eagle Trim hired the Michigan certified public accounting ("CPA") firm of Weber, Curtin & Drake, PC ("WCD") to conduct these year-end audits and to prepare Eagle Trim's corporate income tax returns. In an engagement letter describing the scope of its services, WCD stated that its audits would be designed "to provide reasonable assurance of detecting errors or fraud that would have a material effect on the financial statements." The letter cautioned, however, that an audit, even performed in accordance with generally accepted auditing principles ("GAAP"), "is not a guarantee of the accuracy of the financial statements, and there is a risk that material errors or fraud may exist and not be detected."

         Although Byrne and Kus were responsible for Eagle Trim's income tax returns, Fuller, as controller, had wide discretion over Eagle Trim's financial activities, and the responsibility to ensure that Eagle Trim's tax liabilities-including both trust-fund tax deposits and returns- remained current. In January 1999, WCD provided Fuller with the forms he needed to comply with the relevant tax laws and also provided guidance on how to prepare and file trust-fund taxes. Despite this guidance, Fuller deposited trust-fund taxes with the IRS on a biweekly, as opposed to a semiweekly, basis. See 26 C.F.R. § 31.6302-1(b). This resulted in a large penalty assessment against Eagle Trim in early 1999. By the end of 1999, Kus and Byrne had decided that Fuller was not adequately performing his duties, and Kus provided Fuller a handwritten list of tasks that he needed to start completing accurately and timely.

         In March 2000, GMAC's auditor, Lender Services, sent a letter to GMAC, stating that Eagle Trim had provided inadequate supporting documentation for Lender Services' collateral reviews. Lender Services therefore recommended, among other things, that Eagle Trim implement procedures to "[e]nsure all tax payments are made timely[] with supporting detail retained." GMAC forwarded this letter to Eagle Trim, and Kus reviewed it. Within two weeks, Fuller sent a letter to GMAC, responding to Lender Services' letter. Fuller acknowledged that he missed two trust-fund tax deposits during Eagle Trim's switch from Northwestern Bank to National City Bank, but he asserted that Eagle Trim was then current with all tax deposits. Fuller copied Kus and Byrne on this correspondence.

         Also in March 2000, WCD sent a letter to Kus, copying Byrne and Fuller, advising Eagle Trim of deficits in its accounting practices, which WCD had observed while conducting its 1999 audit. The letter also stated, however, that WCD's observations did not discover any "material weaknesses, " defined as conditions which Eagle Trim's internal control structure failed to "reduce to a relatively low level the risk that errors or fraud in amounts that would be material in relation to the financial statements being audited may occur." WCD recommended in its letter that Eagle Trim hire an assistant controller with an accounting degree.

         Pursuant to WCD's recommendation, in April 2000, [3] Eagle Trim hired Kelly Gillman, an accountant, to assist Fuller with his duties as controller. Perhaps due in part to Fuller's continued mishandling of Eagle Trim's finances, [4] in July 2000, Eagle Trim also hired Andrew Jones as Eagle Trim's chief financial officer. As CFO, Jones reported to both Byrne and Kus on all of the financial aspects of Eagle Trim. Fuller reported to Jones, providing monthly financial statements for Jones to review.

         In October 2000, the IRS sent Eagle Trim a notice of a penalty for $98, 622.32 for unpaid trust-fund taxes for the first quarter of 2000. David Drake, a WCD partner, met with Fuller to discuss the penalty. Fuller informed Drake that he had failed to pay the trust-fund taxes on time because of difficulties associated with Eagle Trim's switch from Northwestern Savings Bank to National City Bank. He said that he had contacted the IRS several times about the issue and that an IRS representative had informed him that Eagle Trim had made all trust-fund tax deposits in full and on time since June 14, 2000. Following his conversation with Fuller, Drake sent a letter to the IRS, repeating Fuller's explanation for the late trust-fund tax deposit and requesting that the IRS waive the penalties. Drake also attached an Eagle Trim check to the letter to pay the interest on the late trust-fund taxes. On November 10, 2000, Fuller sent a letter to Kus, Byrne, and Jones, describing the IRS penalty, his meeting with Drake, and Drake's request for an abatement of the penalty.

         WCD issued a "clean" audit on December 11, 2000, regarding Eagle Trim's financial statements through September 30, 2000, opining that the financial statements presented Eagle Trim's financial position fairly in all material respects. The report found that Eagle Trim was current in the payment of trust-fund taxes. Despite WCD's clean audit report, in January 2001, WCD sent a letter to Kus, copying Byrne, Jones, and Fuller, identifying flaws in Eagle Trim's accounting practices observed by WCD in the course of its 2000 audit. The letter included a section devoted to Eagle Trim's failure to pay trust-fund taxes in a timely manner, recounting the IRS penalties assessed for unpaid trust-fund taxes in 1999 and the first quarter of 2000. The letter added that WCD had been informed by "management" that trust-fund taxes for the second quarter of 2000 had been untimely as well, though the IRS had not yet assessed a penalty. WCD recommended that Eagle Trim "take the measures necessary to ensure that all payroll taxes and withholdings are deposited ...

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