MEMORANDUM AND OPINION
LEE H. ROSENTHAL, Chief District Judge.
Dr. Robert McClendon sued the United States, seeking a tax refund for a penalty assessed under 26 U.S.C. § 6672 for unpaid employment taxes. The government moved for summary judgment. (Docket Entry No. 24). Based on the pleadings, motions, record, and applicable law, the government's motion is granted. The reasons are explained in detail below.
A brief recitation of the facts is enough. Dr. McClendon founded Family Practice Associates of Houston, a medical-services provider, in 1979. (Docket Entry No. 28 at 8).
Family Practice stopped operating and remitted its remaining receivables to the IRS to pay toward the tax liability. (Id.). Dr. McClendon made a $100,000 personal loan to Family Practice "for the restricted purpose of . . . using the funds to pay the May 15, 2009 payroll." (Id.). Family Practice used that loan to pay its employees. (Docket Entry No. 24-3, Exh. 2 at 7) (McClendon deposition).
McClendon was assessed a total of $4,323,343.70 in tax penalties under 26 U.S.C. § 6672. (Docket Entry No. 24-4, Exh. 3). He paid a small part, then sued for a refund and abatement of the remaining penalty amount. (Docket Entry No. 1). After discovery, the government moved for summary judgment. (Docket Entry No. 24).
II. The Applicable Legal Standards
A. Summary Judgment
"Summary judgment is required when `the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.'" Trent v. Wade, 776 F.3d 368, 376 (5th Cir. 2015) (quoting FED. R. CIV. P. 56(a)). "A genuine dispute of material fact exists when the `evidence is such that a reasonable jury could return a verdict for the nonmoving party.'" Nola Spice Designs, LLC v. Haydel Enters., Inc.,783 F.3d 527, 536 (5th Cir. 2015) (quoting Anderson v. Liberty Lobby, 477 U.S. 242, 248 (1986)). "The moving party `bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact.'" Id. (quoting EEOC v. LHC Grp., Inc., 773 F.3d 688, 694 (5th Cir. 2014)); see also Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986).
"Where the non-movant bears the burden of proof at trial, the movant may merely point to the absence of evidence and thereby shift to the non-movant the burden of demonstrating by competent summary judgment proof that there is an issue of material fact warranting trial." Id. (quotation marks omitted); see also Celotex, 477 U.S. at 325. Although the party moving for summary judgment must demonstrate the absence of a genuine issue of material fact, it does not need to negate the elements of the nonmovant's case. Boudreaux v. Swift Transp. Co., 402 F.3d 536, 540 (5th Cir. 2005). "A fact is `material' if its resolution in favor of one party might affect the outcome of the lawsuit under governing law." Sossamon v. Lone Star State of Texas, 560 F.3d 316, 326 (5th Cir. 2009) (quotation omitted). "If the moving party fails to meet [its] initial burden, the motion [for summary judgment] must be denied, regardless of the nonmovant's response." United States v. $92,203.00 in U.S. Currency, 537 F.3d 504, 507 (5th Cir. 2008) (quoting Little v. Liquid Air Corp., 37 F.3d 1069, 1075 (5th Cir. 1994) (en banc) (per curiam)).
"Once the moving party [meets its initial burden], the nonmoving party must `go beyond the pleadings and by her own affidavits, or by the depositions, answers to interrogatories, and admissions on file, designate specific facts showing that there is a genuine issue for trial.'" Nola Spice, 783 F.3d at 536 (quoting LHC Grp., 773 F.3d at 694). The nonmovant must identify specific evidence in the record and articulate how that evidence supports that party's claim. Baranowski v. Hart, 486 F.3d 112, 119 (5th Cir. 2007). "This burden will not be satisfied by `some metaphysical doubt as to the material facts, by conclusory allegations, by unsubstantiated assertions, or by only a scintilla of evidence.'" Boudreaux, 402 F.3d at 540 (quoting Little, 37 F.3d at 1075). In deciding a summary-judgment motion, the court draws all reasonable inferences in the light most favorable to the nonmoving party. Connors v. Graves, 538 F.3d 373, 376 (5th Cir. 2008); see also Nola Spice, 783 F.3d at 536.
B. Trust-Fund Recovery Penalties under 26 U.S.C. § 6672
Arriondo v. United States, No. CV H-14-2734, 2016 WL 3982526, at *8 (S.D. Tex. July 22, 2016) (Lake, J.).
McClendon concedes that he was a "responsible person" within the statute. (Docket Entry No. 28 at 6 n.1). The only issue is whether he willfully failed to collect, account for, or pay taxes that Family Practice owed to the IRS. "[O]nce an assessment of penalty taxes is made and it is established that the taxpayer is a responsible person, the burden of proving lack of willfulness is on the taxpayer." Mazo v. United States, 591 F.2d 1151, 1155 (5th Cir. 1979).
A responsible person has a duty to ensure that a taxpayer's unencumbered funds are used to pay back taxes it owes the IRS, rather than to pay other creditors. "Willfulness under § 6672 requires only a voluntary, conscious, and intentional act, not a bad motive or evil intent." Barnett, 988 F.2d at 1457. "A considered decision not to fulfill one's obligation to pay the taxes owed, evidenced by payments made to other creditors in the knowledge that the taxes are due, is all that is required. . . ." Id. (quoting Howard v. United States, 711 F.2d 729, 736 (5th Cir. 1983)). "Willfulness is normally proved by evidence that the responsible person paid other creditors with knowledge that withholding taxes were due at the time to the United States." Id. Payment of wages to employees counts as a payment to a creditor for purposes of this principle. Logal v. United States, 195 F.3d 229, 232 (5th Cir. 1999). "If a responsible person knows that withholding taxes are delinquent, and uses corporate funds to pay other expenses, even to meet the payroll out of personal funds he lends the corporation," he has acted willfully within the meaning of the statute. Phillips v. U.S. I.R.S., 73 F.3d 939, 942 (9th Cir. 1996) (emphasis added).
The Fifth Circuit has consistently recognized that it is possible for a responsible person to evade a willfulness finding by demonstrating "reasonable cause" to pay a creditor and not the IRS. Newsome v. United States, 431 F.2d 742, 746 (5th Cir. 1970). To say that the defense is "exceedingly limited" is an understatement. In this circuit, no taxpayer appears to have successfully demonstrated "reasonable cause." And the defense is not even available to a "responsible person who knew that the withholding taxes were due, but who made a conscious decision to use corporate funds to pay creditors other than the government." Logal, 195 F.3d at 233.
Summary judgment for the government is proper because the undisputed facts show that, as a matter of law, Dr. McClendon acted willfully. After Dr. McClendon knew that Family Practice owed back taxes, he loaned Family Practice money to make payroll. Family Practice used that money to pay its current payroll obligation to its employees rather than to pay the taxes it owed. Dr. McClendon makes two arguments for why this does not create liability under § 6672. Neither is persuasive.
Dr. McClendon first argues that because he loaned the money to Family Practice on the understanding that it could use the money only to cover payroll, the funds were "encumbered." Willfulness is shown as a matter of law only by evidence that a responsible person directed "unencumbered" funds to a creditor other than the government. (Docket Entry No. 24-25).
Funds are "encumbered" when "the taxpayer's discretion in the use of funds is subject to restrictions imposed by a creditor holding a security interest in the funds [. . . that] is superior to any interest claimed by the IRS. Funds "are regarded as encumbered if those restrictions preclude a taxpayer from using the funds to pay the trust fund taxes." Barnett v. I.R.S., 988 F.2d 1449, 1458 (5th Cir. 1993) (adopting the Eighth Circuit definition of "unencumbered" funds stated in Honey v. United States, 963 F.2d 1083 (8th Cir.1992)).
Dr. McClendon seizes on this language to argue that because he loaned the money to Family Practice with the express restriction that it could use the money only to cover payroll, the funds were "encumbered." He argues that this "restriction" from the lender was an "encumbrance" legally sufficient to shield him (as lender) from liability for Family Practice's use of the money to pay the employees' wages and salaries, rather than to pay the government.
The Barnett court incorporated the Eighth Circuit's analysis of "encumbrances," citing Honey as authority. Barnett, 988 F.2d at 1458; see also Conway, 647 F.3d at 237 (citing Honey for the proposition that funds are encumbered "only where the taxpayer is legally obligated to use the funds for a purpose other than satisfying the preexisting employment tax liability and if that legal obligation is superior to the interest of the IRS in the funds"). As the Sixth Circuit has persuasively explained in following and in applying Honey, that case does not stand for the proposition that a responsible person can shield himself from liability by entering into preferential lending arrangements, in which the person voluntarily assumes a contractual obligation to pay some set of creditors before paying the government. Bell v. United States, 355 F.3d 387, 396 (6th Cir. 2004). Voluntarily assumed contract obligations to use certain funds for a specific purpose are not the sort of "legal obligation . . . superior to the interest of the IRS" that Honey contemplated. Id. The Sixth Circuit concluded that:
Id. The reasoning in Bell is persuasive. Dr. McClendon testified that his purpose in lending the money was to provide money that Family Practice could use to pay certain creditors (its employees) on a preferential basis, rather than paying the government. (Docket Entry No. 24-3, Ex. 2 at 7). The funds were not "encumbered" in the relevant sense, and Dr. McClendon's argument fails.
Dr. McClendon also argues that he had reasonable cause to provide a way to pay the employees because "he acted morally and generously in using his own money to make sure Family's staff . . . were paid for the work they had performed. . . ." (Docket Entry No. 28 at 26). Fully accepting as a fact that Dr. McClendon's motives were admirable does not make that fact legally relevant. Dr. McClendon provides no authority for holding that a taxpayer who consciously decides to use unencumbered funds to pay a creditor other than the government had reasonable cause to do so because the taxpayer had good motives. The Fifth Circuit has made clear that a taxpayer who consciously decides to use unencumbered funds to pay a creditor other than the government cannot benefit from the reasonable-cause defense. Logal, 195 F.3d at 233. There is no basis for a different result here.
The government's motion for summary judgment is granted. Final judgment in the government's favor will be entered by separate order.