Argued: December 8, 2016
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
Ivan C. Dale, UNITED STATES DEPARTMENT OF JUSTICE,
Washington, D.C., for Appellee.
Randolph T. Barker, BERRY MOORMAN P.C., Detroit, Michigan,
Scott R. Murphy, BARNES & THORNBURG LLP, Grand Rapids,
Michigan, for Appellants.
C. Dale, Jonathan S. Cohen, UNITED STATES DEPARTMENT OF
JUSTICE, Washington, D.C., for Appellee.
Before: BATCHELDER, STRANCH, and DONALD, Circuit Judges.
M. BATCHELDER, Circuit Judge.
Internal Revenue Code, 26 U.S.C. § 6672, permits the
United States to recover unpaid trust-fund
taxes 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.
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.
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.
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.
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
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."
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.
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.
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
to WCD's recommendation, in April 2000,  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,
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.
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.
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 ...