Nakano v. United States

Under 26 U.S.C. § 6672, assets are “encumbered” only if the taxpayer has a legal obligation to use the funds for a purpose that is superior to the interests of the Internal Revenue Service, and the Air Transportation Safety and System Stabilization Act did not affect the bankrupt taxpayer’s obligation to remit the excise tax to the federal government.

Raymond Nakano was an executive of National Airlines (“National”). Airlines must collect excise taxes from passengers, which are remitted to the federal government. The airlines incur liability for the taxes if the taxes are not transferred on time. The Air Transportation Safety and Stabilization Act (“the Act”) allows airlines “to defer the third-quarter 2001 excise tax” payment. National failed to meet the Act’s extended deadline. National went bankrupt. Nakano incurred personal liability for National’s excise taxes and paid a “nominal amount.” He brought a claim against the United States “for a refund of taxes erroneously assessed.” The government counterclaimed for the unpaid excise taxes and was granted summary judgment. On appeal, the Ninth Circuit noted that a person incurs personal liability for unpaid excise taxes if he was “required to collect, truthfully account for,” and remit the taxes and “willfully failed to meet one” of the statute’s obligations. Nakano claimed that he did not meet the second requirement and that there was no “willfulness” if the “encumbered” funds are not used to pay excise tax. Other circuits have concluded 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 Internal Revenue Service’s interest. Following this precedent, the panel reasoned that Nakano’s assets were unencumbered. Nakano argued that “operating expenses take priority over taxes” in a bankruptcy. The panel disagreed because paying the operating expenses and taxes were equally important. Nakano claimed that the Act allowed the deferred taxes to be used for operational expenses. The panel disagreed. The Act gives no indication that excise taxes could be used for operational expenses. Thus, the panel held that Nakano had “willfully failed” to remit the excise. AFFIRMED.