Roxanne Bell v. United States of America

1
RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
ELECTRONIC CITATION: 2004 FED App. 0006P (6th Cir.)
File Name: 04a0006p.06
UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________
ROXANNE BELL,
Plaintiff-Appellant,
v.
UNITED STATES OF AMERICA,
Respondent-Appellee.
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No. 02-3295
Appeal from the United States District Court
for the Northern District of Ohio at Akron.
No. 99-02102—Patricia A. Hemann, Magistrate Judge.
Argued: July 31, 2003
Decided and Filed: January 7, 2004
Before: DAUGHTREY, MOORE, and SUTTON, Circuit
Judges.
_________________
COUNSEL
ARGUED: David G. Umbaugh, UMBAUGH & SHARP,
Hudson, Ohio, for Appellant. Karen D. Utiger, UNITED
STATES DEPARTMENT OF JUSTICE, Washington, D.C.,
for Appellee. ON BRIEF: David G. Umbaugh, UMBAUGH
& SHARP, Hudson, Ohio, for Appellant. Karen D. Utiger,
Teresa E. McLaughlin, UNITED STATES DEPARTMENT
2 Bell v. United States No. 02-3295
OF JUSTICE, Washington, D.C., Annette G. Butler,
ASSISTANT UNITED STATES ATTORNEY, Cleveland,
Ohio, for Appellee.
_________________
OPINION
_________________
KAREN NELSON MOORE, Circuit Judge. Many
employers are required to withhold various taxes from the
wages of their employees, which the employers hold in trust
until the taxes are paid over to the federal government.
Failure to forward these “trust fund” taxes to the government
violates § 6672(a) of the Internal Revenue Code (“Code”), 26
U.S.C. § 6672(a). This case involves a determination of what
constitutes a willful failure to pay those taxes. Plaintiff-
Appellant Roxanne Bell brought an action against the Internal
Revenue Service (“IRS”) claiming a refund for $58,902.24
that was paid to satisfy an assessment made against the late
Willard R. Bell (“Bell”). She claimed that Bell did not
willfully fail to pay trust fund taxes, because his company’s
relationship with its lending institution deprived him of
control over his company’s funds such that he could not pay
the taxes. The district court granted the government’s motion
for summary judgment. We AFFIRM because Bell’s
voluntary commencement of a contractual relationship with
a bank that limited but did not deprive him of his ability to
pay the trust fund taxes and Bell’s repeated payments to
creditors other than the federal government constituted a
willful failure under § 6672(a).
I. BACKGROUND
Bell’s difficulties with the IRS trace back to July 1990,
when Bell purchased Dyac Corporation, a floundering
company that manufactured industrial fasteners and shell
casings for munitions. It is not disputed that Bell was the
largest stockholder (51.5% of shares) and chief operating

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No. 02-3295 Bell v. United States 3
officer of Dyac, nor is it disclaimed that Bell essentially ran
the company on a day-to-day basis. Like any other business,
Dyac was responsible for withholding federal wage, Federal
Insurance Contribution Act (“FICA”), and Medicare taxes
from employees’ wages and keeping them in “trust” until it
remitted them to the federal government on a quarterly basis.
Dyac sufficiently met its trust fund tax obligations through
the fourth quarter of 1991.
Dyac was struggling financially at and following its
acquisition by Bell. Bank One, which had served as a lender
to Bell during the acquisition process, provided Dyac with a
revolving line of credit secured by security interests in Dyac’s
assets. As a consequence of financial problems throughout
1991, Bank One and Dyac amended their loan agreement
several times. On September 30, 1991, Bank One and Dyac
signed the “Fourth Amendment to the Credit and Security
Agreement,” which provided for the commencement of a
lock-box arrangement. Bell and Dyac would place all cash
receipts into the lock-box, which reduced Dyac’s mounting
indebtedness to Bank One. Then, Bank One would release
additional loan advances into one or more of Dyac’s three
accounts with the Bank (a general operating account, a
payroll account, and a trust fund account). In order to obtain
these advances, Dyac had to submit a “borrowing certificate”
to Bank One on a weekly and sometimes daily basis.
The issue of who controlled Dyac’s funds is paramount.
Bank One did not actually pay any of Dyac’s bills under this
arrangement; the Bank released the funds to Dyac’s accounts,
and Bell, as the chief operating officer, disbursed the money
without further bank supervision. The Bank did control how
much money flowed into Dyac’s bank accounts, but the Bank
did not actually control the company’s financial outlays. Bell
alleged in a deposition that Bank One had considerable
authority over Dyac’s accounts. He contended that Bank One
often would refuse to advance funds until Dyac submitted a
list of payees and Bank One would then edit the list so as to
disallow certain payments. Bell also claimed that Bank One
4 Bell v. United States No. 02-3295
“stepped over the line . . . exercising complete control over
which obligations would be paid.” Joint Appendix (“J.A.”)
at 307 (Bell Statement, Apr. 3, 1996). Bank One, however,
disclaims this recounting of its relationship with Dyac.
Dyac’s financial woes did not cease, and by January 1992,
Dyac had overextended its credit with Bank One. On
January 22, 1992, Dyac and Bank One entered into a
Forbearance Agreement, which permitted Dyac to keep its
doors open. The Forbearance Agreement perpetuated the
lock-box arrangement, reduced the loan-advance ceiling, and
explicitly addressed the payment of trust fund payroll taxes:
The Borrower agrees that the first Revolving Loans
available to it hereunder as of the date . . . hereof . . . and
thereafter as may be necessary . . . shall be set aside and
reserved for the payment of that week’s projected payroll
and “trust fund” payroll taxes, as the same are set forth
on the Budget; and the Borrower hereby instructs the
Bank without further instruction or request from the
Borrower, to advance such Revolving Loans as deposits
into the Borrower’s payroll account maintained at the
Bank and hereby further agrees that such sums shall be
drawn upon solely for such purposes.
J.A. at 99 (Forbearance Agreement). At some point after
December 1991, Bank One stopped approving loan advances
to cover the payroll trust fund taxes. The timing of Bank
One’s cessation of trust fund loan advances is in dispute. In
a letter/memorandum dated April 3, 1996, Bell claimed that
in “mid December [1991]” Bank One “began excluding
Payroll Trust Items” from the items approved on the
borrowing certificates. J.A. at 306-07 (Bell Mem.).
However, a Bank One loan officer noted in a memo
requesting approval for the Forbearance Agreement on
January 22, 1992, that the Bank would advance $16,500 as
part of the agreement, partially to be used for trust fund taxes.

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No. 02-3295 Bell v. United States 5
1The total amount o wed by Bell equaled $ 66,7 29.0 5, including
interest and fees. Bell and his estate resolved the debt through a series of
payments: (1) Bell applied a credit of $8,203.00 from a previous
On February 12, 1992, Bank One denied Dyac’s request for
additional loan advances to pay off Dyac’s past trust fund tax
obligations. Bell sent Bank One a fax that requested an
advance for “past trust fund obligations which the Company
has not been able to obtain the release of our funds from the
Bank to be able to discharge.” J.A. at 280 (Facsimile Dated
02/12/92). The fax specifically mentioned over $51,000 in
FICA trust fund taxes that were in arrears for most of January.
Gary Sprague (“Sprague”), the Bank One loan officer in
charge of the Dyac accounts, denied the request because Bank
One had already lent Dyac money for payroll taxes in January
and this additional request represented an overadvance that
was not covered by the Forbearance Agreement.
During January, February, and the first week of March in
1992, Dyac failed to pay to the IRS any trust fund taxes.
Dyac had thus failed to pay six weeks of trust fund taxes in
1992 before the February 12 refusal by Bank One to advance
any funds for the past tax debt. Dyac then failed to pay any
taxes for the rest of February and March. Yet, Dyac still
continued to disburse funds, as it withdrew over $1.37 million
from its three bank accounts during that time. Additionally,
Dyac continued to pay money to other creditors during the
first quarter of 1992, as Thomas Small, the Vice-President of
Dyac, stated that Dyac satisfied its obligations to vendors,
such as the phone company, the electric company, and several
steel suppliers while the delinquent taxes accrued.
Dyac filed for bankruptcy on March 6, 1992. On March 17,
1997, the IRS made an assessment of $58,902.24 against Bell
under § 6672 of the Code for the full amount of the unpaid
trust fund tax debt from the first quarter of 1992. See 26
U.S.C. § 6672. Bell paid the assessment and requested a
refund, which the IRS ultimately denied in September 1997.1
6 Bell v. United States No. 02-3295
overpayment on April 15, 1997; (2) Bell made a $1,000.00 payment on
May 7, 1997; (3) Bell applied a credit of $1,417.00 from a previous
overpayment on April 15, 1998; (4) Bell’s estate made a payment of
$346.00 on June 10, 1998; and (5) Bell’s estate made a payment of
$55,806.25 on November 7, 1998. Bell overpaid by $43 .35, which the
IRS refunded in December 199 8. On A pril 29 , 199 7, Bell filed a timely
refund claim for the $8 ,203 .00. H e subsequently amended the refund
claim to contest also the $1,000 payment made on May 7, 1997. The IRS
denied the consolidated claim on Sep tember 4, 1997 . Roxanne Bell did
not file a refund claim for the mo ney pa id in Ap ril, June, and November
1998 until after she filed the action in this court. On May 1, 2000,
Roxanne Bell filed a claim for the entire $58,902.24. Her claim regarding
the $1,417.00 credit applied to the debt on April 15, 1 998 was untimely
because it was filed more than two yea rs after the tax was paid. See 26
U.S.C. § 6511(a). The IRS denied the claim on November 16, 2000.
2The action was timely because it was filed within two years of the
denial of the claim for refund. See 26 U.S.C. § 65 32(a)(1).
Following Bell’s death, Roxanne Bell brought this refund
action on September 3, 1999,2 as an individual, as executrix
of Bell’s Estate, and as Trustee of the Willard R. Bell Living
Trust. Upon consent of the parties, the case was transferred
to a U.S. Magistrate Judge for disposition. 28 U.S.C.
§ 636(c)(1). The Government filed a motion for summary
judgment, and in response Roxanne Bell conceded that Bell
was responsible for paying the trust fund taxes but denied that
he willfully failed to pay the taxes. The magistrate judge
granted the Government’s summary judgment motion,
concluding that because Bell used Bank One’s loan advances
to pay creditors other than the IRS and because Bell knew that
the trust fund taxes were not being paid, as evinced by his
complaints that he needed to receive additional loans to pay
the taxes, he was responsible and willfully had failed to pay
the taxes. The court also rejected Roxanne Bell’s argument
that there was “reasonable cause” for Bell’s failure to pay the
taxes, such that he should be excused from his liability. The
district court had proper jurisdiction over Roxanne Bell’s

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No. 02-3295 Bell v. United States 7
3The Governme nt renews its contention that the district court did not
have jurisdiction over Ro xanne Bell’s claim regarding the rejection of the
second refund claim filed in May 2000. In her co mplaint, Roxanne Bell
sought to reco ver the full amount, $58,90 2.24. The comp laint, though,
only mentio ned the Ap ril 199 7 refund claim that the IRS denied in
September 1997. The government correctly stated in its answer that the
district court at that point could not hear the claim b ecause Ro xanne Bell
did not co mply with 26 U.S.C. § 7 422 (a), which states that “[n]o suit . . .
shall be maintained in any court for the recovery of any internal revenue
tax alleged to have been erroneously or illegally assessed or co llected . . .
until a claim for refund or credit has been duly filed with the [IRS].” 26
U.S.C. § 7422(a). The government failed to file a motion to dismiss on
these grounds. The government next filed a motion for summary
judgment in November 2 001, arguing again that the second refund claim
was not properly before the district court. However, by this point, more
than a year had passed since the IRS had rejected Roxanne B ell’s second
refund claim, and the district co urt thus co uld properly consider the claim.
The government asserts now that Roxanne B ell’s com plaint is faulty.
This argument fails, however, because while Roxanne Bell’s complaint
may have been premature earlier in the litigation due to her failure to file
a refund claim with the IRS, she did eventually exhaust her administrative
remedy, and Roxanne Bell’s com plaint sufficiently states a claim for the
full $58,902 .24 over which the district court has jurisdiction.
initial claim pursuant to 26 U.S.C. § 1346(a)(1),3 and this
court has jurisdiction over her timely appeal pursuant to 28
U.S.C. §§ 636(c)(3), 1291.
II. ANALYSIS
A. Standard of Review
We review de novo the district court’s decision to grant
summary judgment. Allen, Inc. v. CSX Transp., 325 F.3d
768, 771 (6th Cir. 2003). Summary judgment is appropriate
where “there is no genuine issue as to any material fact and
. . . the moving party is entitled to a judgment as a matter of
law.” Fed R. Civ. P. 56(c). The reviewing court must assess
the available proof to determine whether there is a genuine
factual issue that justifies a trial. See Matsushita Elec. Indus.
Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). In
doing so, the court must view the facts and all the inferences
8 Bell v. United States No. 02-3295
drawn from such facts in the light most favorable to the
nonmoving party. 60 Ivy St. Corp. v. Alexander, 822 F.2d
1432, 1435 (6th Cir. 1987). The moving party has the burden
of establishing that no genuine issue of material fact exists,
but the nonmoving party also has a responsibility “to make a
showing sufficient to establish the existence of an element
essential to that party’s case, and on which that party will bear
the burden of proof at trial.” Celotex Corp. v. Catrett, 477
U.S. 317, 322 (1986). Ultimately, the court must determine
whether the evidence is such that a reasonable jury could
return a verdict for the nonmoving party. Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 252 (1986).
B. The Trust Fund Tax Liability Scheme
The Code requires most employers to withhold Social
Security, Medicare, and federal income taxes from their
employees’ wages. See 26 U.S.C. §§ 3102, 3402. Section
7501 provides that the withheld money is held in trust for the
United States until paid to the Treasury on a quarterly basis.
26 U.S.C. § 7501(a); Slodov v. United States, 436 U.S. 238,
243 (1978). The withholding taxes “are part of the wages of
the employee, held by the employer in trust for the
government”; the employer, as a function of administrative
convenience, extracts money from a worker’s paycheck and
briefly holds that money before forwarding it to the IRS.
Gephart v. United States, 818 F.2d 469, 472 (6th Cir. 1987).
A delinquency in trust fund taxes thus is not simply a matter
between the IRS and an employer, but rather involves
employee wages. The significant responsibility of Dyac or
any other employer is summed up by then-Judge Cardozo’s
famous statement that “[a] trustee is held to something stricter
than the morals of the market place. Not honesty alone, but
the punctilio of an honor the most sensitive, is then the
standard of behavior.” Meinhard v. Salmon, 164 N.E. 545,
546 (N.Y. 1928).
Thus, it should come as no surprise that Congress created
a rigorous penalty for those who fail to remit the withheld

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No. 02-3295 Bell v. United States 9
4Section 6672 (a) reads:
Any person required to collect, truthfully account for, and pay
over any tax imposed by this title who willfully fails to co llect
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, shall, in addition to other penalties
provided by law, be liable to a penalty equal to the total amount
of the tax evaded, or not collected, or not accounted for and p aid
over.
26 U.S.C. § 6 672 (a). See also Slodov v. United States, 436 U.S. 238, 245
(1978) (“[A]n employer-official or other employee responsible for
collecting and p aying taxes who willfully fails to do so is subject to . . .
a civil penalty equivalent to 100% of the taxes not collected or paid
. . . .”). Criminal penalties are also available but are not at issue in this
case.
trust fund taxes to the government. Section 6672(a) provides
that “any person” who is required to collect the taxes and
willfully fails to pay them over to the government is
personally liable for 100% of the delinquent taxes. 26 U.S.C.
§ 6672(a).4 The statute’s punitive nature comes not from an
increased monetary penalty, as the responsible party is not
liable for an amount that is higher than the delinquent tax
balance, but rather from personal, as opposed to corporate,
liability. Section 6672 thus exists “to protect the government
against losses by providing it with another source from which
to collect the withheld taxes.” Gephart, 818 F.2d at 473; see
also Bolding v. United States, 565 F.2d 663, 669 (Ct. Cl.
1977) (“Congress has allowed the IRS more stringent
protective devices to insure collection of payroll taxes than in
the case of many other taxes.”).
We, in step with other circuits, have held that an individual
is liable under § 6672(a) if he or she: 1) is responsible for
paying the taxes and 2) willfully fails to turn over the tax
money to the government. See Kinnie v. United States, 994
F.2d 279, 283 (6th Cir. 1993); McDermitt v. United States,
954 F.2d 1245, 1250 (6th Cir. 1992). To obtain a refund of
a previously paid assessment, a responsible person has the
burden of showing that the assessment is inaccurate, “because
10 Bell v. United States No. 02-3295
he has placed at issue an assessment which is presumed
correct.” Collins v. United States, 848 F.2d 740, 742 (6th Cir.
1988). This burden entails “proving, by a preponderance of
the evidence, that he was not a responsible person who
willfully failed to pay over the withheld taxes.” Id. Roxanne
Bell thus has to demonstrate that a genuine issue of material
fact exists regarding her late husband’s responsibility for the
taxes and his willful failure to pay them in order to show that
the district court erred in its judgment.
C. Responsibility and Willfulness
We first consider whether Bell was a responsible party.
The determination of responsibility focuses on the “degree of
influence and control which the person exercised over the
financial affairs of the corporation and, specifically,
disbursements of funds and the priority of payments to
creditors.” Gephart, 818 F.2d at 473. Courts generally look
at factors such as the duties of the officer as described by the
corporate by-laws and the ability of the individual to sign
checks for the corporation. Id. Both parties here have
conceded that Willard Bell was a responsible party, as he was
the chief shareholder and principal actor for Dyac, and there
is accordingly no genuine issue of material fact on this point.
The question of whether Bell willfully neglected to pay
over the withheld trust fund monies is more complicated.
Under our basic definition of willfulness, “[a] responsible
person who makes a deliberate choice to voluntarily,
consciously, and intentionally pay other creditors rather than
make tax payments[] is liable for willful failure.” Collins,
848 F.2d at 742. The responsible party need not exhibit an
intent to defraud the IRS or some other evil motive; all that is
necessary to demonstrate willfulness is the existence of an
intentional act to pay other creditors before the federal
government. See id.; Calderone v. United States, 799 F.2d
254, 260 (6th Cir. 1986).

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No. 02-3295 Bell v. United States 11
We have held in the past that proof of a responsible
person’s knowledge of payments to other creditors and
awareness of the failure to pay the trust fund taxes is enough
to trigger liability. In Collins, we held that even though the
plaintiff was “a sympathetic figure,” who relied on another’s
promise to pay off the taxes, he still acted willfully because
he knew that the taxes were not being paid and he diverted
funds, which could have been used to offset the tax debt, to
cover other business expenses. Collins, 848 F.2d at 742. In
Gephart, we held that a corporate general manager willfully
failed to pay the trust fund taxes, even though the manager
might have been fired for disobeying his superior’s orders not
to pay the taxes, because the manager was aware of an unpaid
tax debt yet continued to disburse funds to other creditors.
Gephart, 818 F.2d at 475.
Similarly, viewing the evidence in the light most favorable
to Bell, it is clear that Bell knew about the delinquent taxes
and voluntarily paid other creditors before paying the federal
government. The fax from February 12, 1992, in which Bell
requests a $51,000 loan advance to pay the IRS for past trust
fund withholdings, demonstrates that he knew of the tax
delinquencies. But despite this clear awareness of the trust
fund tax debt, Bell continued to pay other creditors. Dyac’s
bank records indicate that it withdrew $619,850 from its
accounts in the month of February, J.A. at 158, 172, 177, and
Bell’s attorney disclosed at oral argument that Dyac paid its
utility and supplier bills while the trust fund taxes went
unpaid.
The crux of Bell’s argument on appeal is that Bell could not
have willfully failed to pay the taxes, because the funds were
“encumbered” by the Bank such that Bell would have paid the
taxes but for the Bank’s refusal to permit him to apply the
loan advances toward the trust fund delinquency. In Huizinga
v. United States, 68 F.3d 139 (6th Cir. 1995), we held that
liability under § 6672(a) hinges upon whether funds that
could be used to pay down the tax debt are “available” or
“unencumbered.” Id. at 145; see also United States v. Kim,
12 Bell v. United States No. 02-3295
111 F.3d 1351, 1358 (7th Cir. 1997) (recognizing our use of
“unencumbered” in assessing willfulness). We stated that a
responsible individual is willful if he “fails to use all
unencumbered funds that come into his possession thereafter
to pay the delinquent taxes.” Huizinga, 68 F.3d at 145
(emphasis added). The encumbrance in Huizinga was a state
statute, the Michigan Building Contract Fund Act, which
statutorily obligated a contractor to hold in trust monies used
to fund construction projects in order “to protect the owner
and those whose labor and materials make the performance of
a construction contract possible.” Id. (quotation omitted).
Here, Bell was contractually obligated to Bank One, and he
had to submit borrowing certificates to garner loan advances,
but no statute or ordinance prevented Bell from paying the
trust fund taxes. Consequently, we are presented with a novel
question of whether a debtor’s voluntary entrance into a
contractual agreement that restricts the debtor’s use of loan
advances in a lock-box arrangement encumbers those loan
proceeds such that the debtor cannot be said to have failed
willfully to meet his or her trust fund obligations because he
or she had limited control over the funds.
In holding that such a contractual obligation does not
constitute an encumbrance that relieves a responsible
individual of liability under § 6672(a), we start with the
definition of “encumbered” presented in Huizinga. There, we
drew our definition of “encumbered” from language in an
Eighth Circuit case when we wrote, “Funds are considered
encumbered ‘only where the taxpayer is legally obligated to
use the funds for a purpose other than satisfying the
preexisting employment tax liability and [the] legal obligation
is superior to the interest of the IRS in the funds.’” Huizinga,
68 F.3d at 145 (alteration in original) (quoting Honey v.
United States, 963 F.2d 1083, 1090 (8th Cir.), cert. denied,
506 U.S. 1028 (1992)). The Honey opinion references a
slightly different definition of encumbered offered by the
Bankruptcy Court for the Eastern District of Michigan in In
re Premo, 116 B.R. 515 (Bankr. E.D. Mich. 1990). The

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No. 02-3295 Bell v. United States 13
5The Eighth Circuit’s use of the Premo test is strange, because in
doing so the court seemingly employed a more encompassing definition
of “encumbered” that would allow a greater number of responsible
persons to avo id liability under § 667 2(a), despite the Eighth Circuit’s
initial statement that its definition of “unencumbered” “should be a broad
one in order to ensure that the taxes are paid.” Honey v. United States,
963 F.2d 1083, 10 90 (8th Cir.).
6The Ninth Circuit in Purc ell v. United States, 1 F.3d 932 (9th Cir.
1993), labeled the Honey and Premo formulations as “competing
standards.” Id. at 939. The court asserted that the Premo standard
employed a “relatively relaxed definition of ‘encumbered funds,’” which
swept more broadly than the language we quoted from Honey. Id.
7Even the Premo court noted that “[t]he existence of a superior lien,
without more, does not create an encumbrance for purposes of § 6672 [],
[as] there must be conditions imposed by the lender which render the
Honey court first quoted the Premo decision, which set forth
the following definition:
Where the taxpayer’s discretion in the use of funds is
subject to restrictions imposed by a creditor holding a
security interest in the funds which is superior to any
interest claimed by the IRS, the funds are regarded as
encumbered if those restrictions preclude the taxpayer
from using the funds to pay the trust fund taxes.
Premo, 116 B.R. at 535. Then, the Honey court distilled the
Premo definition into the language that we quoted in
Huizinga. Although the Honey court ostensibly adopted the
Premo definition of “encumbered,”5 the Honey court’s
distillation of the Premo test is distinct from the precise
language used in Premo.6 The Premo language is broader
than the language we culled from the Honey opinion; the
Premo formulation includes funds that are “subject to
restrictions imposed by a creditor” to whom the debtor is
contractually bound, whereas the Honey formulation that we
adopted in Huizinga labels as “encumbered” only those funds
limited by “legal obligations.”7 Additionally, the Premo test,
14 Bell v. United States No. 02-3295
funds unavailable for payment to the IRS of the trust fund taxes for the
time period in question.” In re Premo, 116 B .R. 515, 535 n.34 (B ankr.
E.D. M ich. 1990).
unlike the Honey test, counts as encumbrances those
restrictions that are not legally enforceable, but “may be
practically irresistible because they arise out of the disparity
of bargaining power as between the taxpayer and its source of
financing.” See Purcell v. United States, 1 F.3d 932, 938-39
(9th Cir. 1993).
We decline to accept the Premo definition. In writing
Huizinga, we quoted the Honey court directly and did not
mention the Premo case at all. It is incorrect to assume that
by incorporating the narrower Honey formulation of
“encumbered” into our case law, we implicitly accepted the
broader Premo test when we did not even quote the Premo
language. Furthermore, the narrower definition of
“encumbered” that we accepted in Huizinga best fits
§ 6672(a), which ensures the timely payment of trust fund
obligations to the government
This still leaves open the question of whether Dyac’s
contractual relationship with Bank One “legally obligated
[Dyac] to use the funds for a purpose other than satisfying the
preexisting employment tax liability . . . .” Huizinga, 68 F.3d
at 145. It is clear from Huizinga that a state statute mandating
the creation of a construction-contract trust constitutes an
encumbrance, but it is not clear whether a contract, while a
legal instrument, is a legal obligation within this context. In
Kalb v. United States, 505 F.2d 506, 510 (2d Cir. 1974), cert.
denied, 421 U.S. 979 (1975), the responsible persons seeking
a refund voluntarily entered into a contract with their bank
under which the responsible persons asked the bank to
forward funds to pay the trust fund debt, but at one point the
bank refused to approve the loan. The responsible persons
had the power to disburse funds, and the court noted that they
were free to rescind their contract with their bank at any

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No. 02-3295 Bell v. United States 15
point. Id. The court stated, “[t]o permit corporate officers to
escape liability under section 6672 by entering into
agreements which prefer other creditors to the government
would defeat the entire purpose of the statute.” Id. It
concluded, “We cannot imagine that in any other context a
trustee could avoid his obligations by entering into an
agreement by which funds entrusted to him are used to pay
his other obligations.” Id.
We agree with this reasoning. Corporate funds should not
be considered encumbered simply because a contractual
obligation with a lender or other creditor impacts a company’s
ability to use its assets, receivables, or loan advances with
complete freedom. If this were the case, then nearly every
responsible person involved with a failing company in the
midst of credit problems or intricate loan arrangements would
be able to avoid a finding of willfulness and thus evade
liability. Such a result would undermine the purpose of
§ 6672 in assuring that trust fund taxes are paid to the
government.
Thus, given the context of Huizinga in which we adopted
our definition of “encumbered,” and in light of the risk of
eviscerating § 6672(a) by permitting voluntary encumbrances
to interfere with the payment of trust fund taxes, we hold that
funds are encumbered only when certain legal obligations,
such as statutes, regulations, and ordinances, impede the
freedom of a company to use its funds to fulfill its trust fund
tax debts. Voluntary contractual obligations, such as the
lock-box arrangement at issue in this case, do not encumber
funds so as to prevent a willful failure to pay trust fund taxes.
Roxanne Bell responds that the above view ignores the
reality that contractual obligations can often exert as much
force on a responsible person as a legal obligation. During
oral argument, Roxanne Bell’s attorney contended that,
because Bank One only advanced Dyac loan proceeds to pay
its utilities and suppliers and refused to forward money to
cover the delinquent tax debt, Bell could not pay the taxes
16 Bell v. United States No. 02-3295
unless he violated the terms of his contract with Bank One,
thereby opening himself up to a breach of contract suit. Such
a contention misunderstands the bedrock purposes of
§ 6672(a); meeting federal trust fund taxation requirements
trumps whatever adverse consequences might result from
failing to navigate the web of various creditor-oriented
obligations in which a troubled company will find itself
entangled. For example, the Ninth Circuit considered a
similar factual situation, in which a lock-box arrangement
gave a debtor company only controlled access to loan
proceeds and only on a request-by-request basis. Purcell v.
United States, 1 F.3d 932 (9th Cir. 1993). The court held that
even under the relaxed Premo standard, the funds were not
encumbered because there were no “particular restrictions
placed on the Company’s use of funds” once the new funds
were advanced. Id. at 939. In Bradshaw v. United States, 83
F.3d 1175 (10th Cir. 1995), a creditor bank required a failing
company to get authorization before disbursing any company
funds by check, and the creditor bank then refused to release
funds for payments of taxes. Id. at 1180 n.5. The court wrote
that rather than evade his responsibility to pay the taxes,
“Bradshaw could have resigned his position with [the
company] or refused to sign any checks and shut down the
business.” Id. at 1181; see also Hochstein v. United States,
900 F.2d 543, 549 (2d Cir. 1990) (ruling that adverse
consequences, such as losing one’s job, “simply are no excuse
for failing to collect and pay” trust fund taxes).
Here, Bank One placed no restrictions on how Dyac could
spend its money once it received the loans, although it did
exercise control before the loan was made. Once Dyac
received the money from the bank, it could have used the loan
proceeds to pay off its trust fund debt. Counsel’s argument
that Bank One choked up the supply of money so that it tied
Bell’s hands distorts the facts. Bank One refused only to
forward more money to cover accrued payroll trust taxes after
February 12th. By that point, Bell had already willfully failed
to pay six weeks of payroll taxes in January and early
February, and he had disbursed six weeks of loan advances to

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No. 02-3295 Bell v. United States 17
creditors other than the federal government. This point is
bolstered by the fact that Bell spent over $1.5 million from
Dyac’s three accounts in the first few months of 1992. While
it is true that Bank One may have refused to earmark certain
loan advances to pay past tax debts at some point in time, the
withdrawals from the bank account demonstrate that there
were at least some funds available to pay the trust fund taxes,
even if doing so somehow violated Dyac’s contract with Bank
One.
It is no excuse now to argue that encumbrances impeded
Bell’s ability to remit the trust fund taxes, as Bell could have
shut down the company, suspended operations, filed for
bankruptcy, applied for a bridge loan from another lender, or
simply violated his contract with Bank One instead of failing
to fulfill his tax debt. None of these options is attractive or
enviable, but in the eyes of § 6672(a), they are the correct
choices. As we have stated, “It is no excuse that . . . the
money was paid to suppliers and for wages in order to keep
the corporation operating as a going concern — the
government cannot be made an unwilling partner in a
floundering business.” Brewery, Inc. v. United States, 33
F.3d 589, 593 (6th Cir. 1994) (quotation omitted).
Additionally, a key distinction between contractual
obligations and the types of legal obligations that can
encumber funds is that in the former situation, a plaintiff
voluntarily and willfully enters into the contractual
arrangement that limits the funds. For example, in Bradshaw,
the court noted that although the plaintiff lacked the power to
pay the trust fund taxes because the bank would not give its
approval, “this lack of power was the direct result of the
Agreement which Bradshaw had negotiated and entered into
on behalf of [the company].” Bradshaw, 83 F.3d at 1181.
Here, Bell entered into the Fourth Amended Agreement,
which set up the lock-box system, and the Forbearance
Agreement, which perpetuated it. Bell voluntarily put himself
and his company in a position in which it was not only
plausible, but also quite foreseeable, that he would overextend
18 Bell v. United States No. 02-3295
8Roxanne Bell also urges us to conclude that Bell had “reasonable
cause” to be delinquent in pa ying his taxe s such tha t he should be excused
from liability. Contrary to the Government’s assertion, we have never
decided whether there exists a reasonab le-cause exception to liability for
willful failure under § 66 72(a). In our only case o n point, Brewery, Inc.
v. United States, 33 F.3d 589 (6th Cir. 1994), we simply made the
comm onsense comparison between the text of § 6672(a), which does not
contain a reasonable-cause exception, and the statutory provision at issue
in Brew ery, which d id contain an explicit reasonable-cause exception. Id.
at 593.
W e do not reso lve this question here. W e note that at least one circuit
has held that reasonable cause exists where “(1) the taxpayer has made
reasonable efforts to protect the trust funds, but (2) those efforts have
been frustrated by circumstances outside the taxpayer’s control.” Finley
v. United States, 123 F.3d 13 42, 1348 (10th Cir. 199 7); see also H owell
v. United States, 164 F.3d 523 , 526 (10th Cir. 1998 ). The desire for an
exception stems fro m a fear that § 6 672 (a) has become a strict-liability
statute, pro mptin g concern fro m some courts. See generally, Phillips v.
IRS, 73 F .3d 9 39, 9 43 (9th Cir. 199 6); Williams v. United States, 931 F.2d
805, 811 (11th Cir. 1991).
However, there are extremely persuasive arguments against judicially
incorporating a reasonable-cause exception. First, C ongress exp licitly
inserted a reasonab le-cause exception into other penalty provisions of the
Code, but not § 6672(a). Compa re 26 U.S.C. §§ 6651(a)(3), 665 2(c)(3),
6656(a); 26 C.F.R. § 301.665 1-1(c). Second, in view of the unique trust
nature of the delinquent taxes at issue in § 6672, a rule rejecting a
reaso nable-cause exception is desirable, even if it prod uces harsh results
in some cases, because the withheld payroll taxes are misdirected. Third,
the penalty for § 6672 is non-punitive, but rather simply attempts to
recoup the full amount of the delinquent taxes. Fourth, it is illogical for
a jury to find that an ind ividual is not liable under § 667 2 (a) bec ause
his loan advances and Bank One would refuse to advance any
more loans, even to pay off the taxes. The limitations placed
on Dyac’s funds were a result of Dyac’s and Bell’s willful
entry into various loan agreements and should not constitute
encumbrances that abrogate a finding of willfulness.
Furthermore, even if Bank One had complete dominion over
Dyac’s finances such that it controlled all financial outlays
and disbursed funds to vendors and other creditors without
Dyac’s intervention, the funds could still not be considered
encumbered because Dyac had voluntarily entered into a
contract giving up its control.8 To hold otherwise would be

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No. 02-3295 Bell v. United States 19
elements existed beyond that perso n’s contro l directly following the jury’s
pred icate finding o f responsibility and willfulness that would make the
invocation of a reasonab le-cause exception necessary. Fifth, several other
circuits have rejected such a reasonable-cause exception. Olsen v. United
States, 952 F.2d 236 , 240 -41 (8 th Cir. 1991 ); Harrington v. United States,
504 F.2d 1306, 1316 (1st Cir. 197 4); Pac. Nat’l Ins. Co. v. United States,
422 F.2d 2 6, 33 & n.1 9 (9th Cir.), cert. denied, 398 U .S. 937 (1970);
Monday v. Un ited States, 421 F.2d 121 0, 12 16 (7th Cir.), cert. denied,
400 U .S. 821 (1970 ).
W e need not take a side in this debate because even if a reasonable-
cause exception should exist in some context, it certainly does not ap ply
here. Bell did not make reasonable efforts to use Bank One’s loan
advances in the early part of January and February to decrease his tax
delinq uency. Mo reover, B ell was not stymied by circumstances outside
his contro l, because Bell had free reign over the loan proceeds once B ank
One advanced them and he also had command over Dyac’s contract with
Bank One. A reasonable-cause exception may exist, but no taxpayer,
including Bell, has “yet carried that p ail up the hill.” Bowen v. United
States, 836 F.2d 96 5, 968 (5th Cir. 1988).
to allow employers an easy escape from federal taxation
responsibilities.
III. CONCLUSION
Taking all the facts and inferences from a viewpoint
favoring Bell, we conclude that there is no genuine issue of
material fact regarding the availability of the funds to pay the
taxes and Bell’s willful failure to pay the trust fund taxes.
Consequently, the judgment of the district court is
AFFIRMED.

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