The government as Defendant-Appellant appeals from a judgment of the district court awarding Plaintiff-Appellee J. Larry Bradshaw a judgment against the United States with respect to a penalty assessment against plaintiff under 26 U.S.C. § 6672 for failure to pay over withholding taxes. Jurisdiction in this court is proper under 28 U.S.C. § 1291.1I

Plaintiff-Appellee J. Larry Bradshaw was president of Heritage Building Products (HBP) during the last quarter of 1985 and the first three quarters of 1986. I App. at 69. HBP was wholly owned by Heritage Corporation. Bradshaw was president of Heritage Corporation and owned 13% of its stock. Bradshaw was also on the board of directors of both corporations. Id. at 66, 69; II App. 152.

HBP had a line of credit from Zions First National Bank (the Bank). I App. 69-71. On May 10, 1985, Bradshaw, on behalf of HBP, entered into a new credit arrangement with the Bank (the Agreement), whereby the Bank established for HBP a revolving line of credit in the amount of $650,000. Id. at 69-71; II App. 239-61. As part of the Agreement, HBP granted the Bank liens on all of HBP's assets and the right to freeze any of HBP's accounts with the Bank in the event of a default. II App. 254-55.

On March 15, 1986, the Bank determined that HBP had defaulted and therefore, pursuant to the Agreement, froze all of HBP's accounts. I App. at 80-84. Thereafter, any funds received by HBP were deposited into a "control account." HBP could not transfer funds from this account to its operating account without the Bank's approval.

Beginning on May 29, 1986, the Bank allowed HBP to disburse funds from its operating account; however, the Bank's approval was required for each disbursement. Id. at 101-02. The Bank would not honor checks that were not pre-approved by it. Id. The Bank approved some payments, such as payment of an insurance premium, payments to Bradshaw for services rendered, and payment of net wages to employees,2 but repeatedly refused to approve payment of federal and state withholding taxes, despite Bradshaw's requests that those payments be authorized. Id. at 89-90, 101-02, 114-16; II App. at 149. Bradshaw, on behalf of HBP, signed the checks for the payments the Bank approved. See II App. at 267-71.

In early 1986, prior to the freeze, Bradshaw personally lent HBP $40,000. Id. at 283-84. These funds were used to pay $15,000 in payroll and to pay $25,000 of interest to the Bank. Id. After the freeze, Bradshaw again lent $40,000 to HBP, which was used to pay $25,000 in interest to the Bank and $15,000 to suppliers. Id.

HBP failed to pay its federal withholding taxes to the IRS in the first three quarters of 1986 and a penalty for the late payment of taxes for the fourth quarter of 1985. In August 1986 Bradshaw, on behalf of HBP, entered into an agreement for voluntary liquidation and HBP ceased doing business in September 1986. Supp.App. at 75-106; I App. at 65.

Pursuant to 26 U.S.C. § 6672 the IRS assessed a 100% penalty ($75,601.01) against Bradshaw as a responsible person who willfully failed to collect or truthfully account for and pay over to the United States federal withholding taxes for the first three quarters of 1986 and for failure to pay the penalty for the late payment of the fourth quarter 1985 taxes.

Bradshaw brought a refund suit seeking the return of $438.60 he had paid as a partial payment of the penalty. The government counterclaimed for the balance of the assessment. After a bench trial, the district court found in favor of Bradshaw, concluding that Bradshaw was not a "responsible person" within the meaning of § 6672 because he had no power to disburse any of HBP's funds without the Bank's approval. The judge also concluded that because of the Bank's "complete control of the company's accounts and assets," Bradshaw's failure to pay the taxes was not willful. The court entered an amended judgment for Bradshaw in the amount of $34,578.54, and the government appealed.3II

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect 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 paid over....

"When a corporate employer neglects to pay the required [federal withholding] taxes, section 6672(a) authorizes the Government to assess the full amount of taxes due against the corporation's responsible officers in the form of a penalty." Howard v. United States, 711 F.2d 729, 733 (5th Cir.1983). This penalty is distinct from and in addition to the employer's liability for these taxes. Id. "The § 6672 penalty may be assessed against (1) any responsible person (2) who has willfully failed to collect, account for, or pay over federal employment taxes." Muck v. United States, 3 F.3d 1378, 1380 (10th Cir.1993). Arguing for reversal, the government says that Bradshaw was a responsible person who willfully failed to collect, account for, or pay over the withholding taxes, and that the district court's conclusions to the contrary were in error.

The government argues that the ultimate determination that Bradshaw was not a responsible person is a question of law subject to de novo review. Appellant's Opening Brief at 12. Bradshaw, on the other hand, argues it is a question of fact subject to the clearly erroneous standard of review. Appellee's Brief at 13-14.

We have recently resolved this question. In Taylor v. Internal Revenue Service, 69 F.3d 411, 415 (10th Cir.1995), we held that the ultimate determination whether an individual is a "responsible person" within the meaning of 26 U.S.C. § 6672 involves an application of law to fact which is subject to de novo review on appeal. This holding agreed with the views of the Second and Eleventh Circuits. See United States v. McCombs, 30 F.3d 310, 319 (2d Cir.1994); Hochstein v. United States, 900 F.2d 543, 547 (2d Cir.1990); Thibodeau v. United States, 828 F.2d 1499, 1503 (11th Cir.1987). We disagreed with other circuits.4

2. Was Bradshaw a Responsible Person?

Courts have generally given a broad interpretation to the term "responsible person" under § 6672. Denbo v. United States, 988 F.2d 1029, 1032 (10th Cir.1993). "A person is responsible within the meaning of the statute if that person is required to collect, truthfully account for or pay over any taxes withheld from the wages of a company's employees." Id. A responsible person generally is, but need not be, a managing officer or employee, and there may be more than one responsible person. Id.; Muck v. United States, 3 F.3d at 1380-81. "Indicia of responsibility include the holding of corporate office, control over financial affairs, the authority to disburse corporate funds, stock ownership, and the ability to hire and fire employees." Denbo, 988 F.2d at 1032. "Among other things, therefore, a corporate officer or employee is responsible if he or she has significant, though not necessarily exclusive, authority in the 'general management and fiscal decisionmaking of the corporation.' " Id. (citation omitted).

Bradshaw was the president of HBP during the last quarter of 1985 and the first three quarters of 1986. He was president of Heritage Corporation (the sole shareholder of HBP) and owned 13% of the Heritage Corporation stock. Bradshaw was also on the board of directors of both corporations. He was an authorized signatory on HBP's accounts and had the authority to hire and fire its employees. Based on these facts, we feel that Bradshaw had the necessary indicia of responsibility to satisfy the requirements of § 6672 to be held a "responsible person."

However, our inquiry is complicated by the fact that at the time the taxes became delinquent, Bradshaw lacked the power to disburse funds from HBP's accounts, absent the Bank's approval. Bradshaw argues that because he lacked this power he was not a "responsible person" under the statute. In this connection the district court made detailed findings on the Bank's exertion of financial control of HBP's assets.5 On the foundation of the findings noted in the margin and others, the district judge concluded that Bradshaw had no authority to disburse HBP's funds in order to pay the withholding taxes and thus was not a "responsible person" under § 6672. We must determine whether, in his conclusions, the judge's application of the law to the facts was correct.

Bradshaw contends that the power of decision on which creditors to pay was "wrenched" without notice from officers at HBP and thereafter exercised by the Bank. Brief for the Appellee at 10, 22. The government argues that "it is clear that [the Bank's] authority [over HBP's finances] was voluntarily granted by [Bradshaw] as president of HBP when ... he ceded authority to the Bank to prevent the disbursement of funds from HBP's accounts without the Bank's approval...." Appellant's Opening Brief at 19. The government asserts that this voluntary cession of financial authority cannot absolve Bradshaw of his responsibility under § 6672. Id. at 23. We agree.

In Kalb v. United States, 505 F.2d 506 (2d Cir.1974), cert. denied, 421 U.S. 979, 95 S. Ct. 1981, 44 L. Ed. 2d 471 (1975), the plaintiff company had entered into a financing arrangement similar to the one between HBP and the Bank. Under the arrangement in Kalb, the bank continued to finance the company but oversaw the company's financial operations. Like Bradshaw, the appellants in Kalb argued that they were not responsible persons because the bank controlled their company's finances. The Second Circuit rejected that argument:

Appellants concede that any power the bank may have had to select which creditors should be paid was granted by appellants as part of the consideration for the bank's continuing financing. ... Appellants maintained legal control of the company, including the power to sign checks. Appellants were always free to rescind the agreement if it involved them in breaches of their duties under section 3402(a).

Id. at 510 (emphasis added). Kalb rests on the premise that a corporate officer may not escape liability as a "responsible person" under § 6672 by voluntarily entering into agreements which permit preferring other creditors to the government. Id. at 510. We are persuaded that this reasoning in Kalb should apply here.

By giving the Bank the power to exercise financial control of HBP in the event of a default, Bradshaw necessarily gave the Bank the power to decide whether or not to pay a given creditor. In this way Bradshaw effectively granted the Bank the power, in the case of HBP's default, to prefer other creditors over the government. While we agree with the district judge that when the Bank froze HBP's accounts Bradshaw lacked the power to pay the taxes absent the Bank's approval, this lack of power was the direct result of the Agreement which Bradshaw had negotiated and entered into on behalf of HBP. At the time the Agreement was executed in May 1985, it is clear that Bradshaw was a responsible person under § 6672. Bradshaw could not cease to be a responsible person simply by ceding to the Bank the right to exert financial control over HBP. See Rykoff v. United States, 40 F.3d 305, 308 (9th Cir.1994) ("the fact that a bank exercises significant control over payments to creditors does not necessarily absolve the corporate officer of liability under § 6672"); cf. Gustin v. United States, 876 F.2d 485, 491-92 (5th Cir.1989) ("[o]ne does not cease to be a responsible person merely by delegating that responsibility to others"); Charlton, 2 F.3d at 240 ("[t]he delegation of disbursal authority does not relieve the delegator of liability").

When the Bank refused Bradshaw's request to pay the taxes, Bradshaw could have resigned his position with HBP or refused to sign any checks and shut down the business. See Howard, 711 F.2d at 734 (the fact that a corporate officer might have been fired if he had disobeyed the CEO's orders to not pay withholding taxes did not make him any less responsible for payment of the taxes); Hochstein, 900 F.2d at 549 (even though controller of corporation might have been fired for paying withholding taxes, "these adverse consequences simply are no excuse for failing to collect and pay" them); cf. Raba, 977 F.2d at 945 (declining to hold that lack of check-signing authority is dispositive of lack of responsibility, noting that to so hold would "open the door to a host of evasive tactics[,] [o]fficers with otherwise unfettered authority simply would deprive themselves of permission to sign corporate checks in order to avoid the designation of 'responsible person.' "). However, Bradshaw neither resigned nor shut down HBP. Instead he continued the business and signed checks to other creditors. The result was that other creditors were favored over the government. These circumstances were a foreseeable result of the terms of the Agreement and are therefore directly attributable to Bradshaw's act of entering the Agreement on HBP's behalf.

"To 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." Kalb, 505 F.2d at 510. It may seem harsh to require a corporate officer in Bradshaw's position to resign or shut down his business in order to avoid liability under § 6672. However, we believe that although the statute is harsh, "the danger against which it is directed ... is an acute one against which, perhaps, only harsh measures are availing." Wright v. United States, 809 F.2d 425, 428 (7th Cir.1987).

Bradshaw argues that we should follow Alsheskie v. United States, 31 F.3d 837 (9th Cir.1994), and conclude that he is not a responsible person. In Alsheskie, Pro Quality Manufacturing, Inc. defaulted on a financing contract with Commercial Financing Services. Commercial Financing then took possession of Pro Quality's assets and formed Lion Manufacturing, Inc. to continue Pro Quality's operations. Id. at 838. Alsheskie became president and chairman of the board of Lion Manufacturing. Alsheskie's duties and powers "included (1) managing the corporation's day-to-day activities, (2) hiring and firing employees, (3) setting employees' wages, (4) signing payroll checks and checks to creditors and (5) preparing accounting records. He also prepared and signed all of Lion Manufacturing's tax returns." Id. at 838-39. Despite this authority, the district court there concluded that Alsheskie was not a responsible person.

A divided panel of the Ninth Circuit upheld the district judge's finding. In so holding the majority concluded "[Alsheskie's] authority was limited not by the directions of the owners of Lion Manufacturing ... but by the financing arrangement. He did not have 'significant control' over what bills to pay or not pay since that control remained, as the district court found, with the parent corporation, Commercial Financing." Id. at 839.

Not only does the majority's holding run counter to the facts in this case and the law of this and other circuits, it compromises the government's efforts to ensure that taxes are withheld and paid over. Otherwise responsible officers of subsidiary companies can now excuse their failure to pay corporate taxes by claiming the parent company controlled the corporate finances. And responsible parties will continue to argue that their failure to pay over the taxes was not willful because they relied on the assurances of others that the taxes would eventually be paid. The majority has created an unfortunate loophole in what had been a potent weapon against tax fraud.

Id. at 841 (Trott, J., dissenting).

We believe the dissent in Alsheskie is the more persuasive view. Moreover the circumstances there differ from those before us.6

Bradshaw makes a separate argument dealing with the question of his liability for the late payment penalty on Heritage's 1985 fourth quarter taxes. He says the district judge properly addressed that issue separately in his findings and conclusions (the finding, inter alia, that there was an assessment made in November 1987 of $2,493.95 for the period ending December 31, 1985).7 Bradshaw contends that Heritage paid the full amount of taxes for the last quarter of 1985 and did not pay the assessed penalty

based on an understanding that the penalty had been abated because Heritage was paying the full amount of taxes and interest. The district court further noted that when Heritage became aware that the penalty had not been abated, no employee of Heritage had the ability to or control of funds required to disburse monies to the IRS in payment of the penalty.

Brief for the Appellee at 11-12.

The trial judge's Finding 12 does state that the $40,963.37 payment on 1985 fourth quarter tax was made after discussion with the IRS "in which plaintiff understood that [the IRS] would waive the penalty because taxes and interest were being paid." However we do not read this as finding any binding agreement or waiver of the 1985 late payment penalty assessed. The government, according to the finding, a few months later notified the company that the penalty had been reinstated. The fact that then the Bank controlled the funds and refused to pay the 1985 late payment penalty or any other withholding taxes presents the same question we have already resolved--that entering into an agreement that another institution may control disbursement of the company's funds does not absolve a corporate officer of liability under § 6672.

In sum, the Bank was able to seize control of HBP's finances only because Bradshaw, acting as president of HBP, entered into the Agreement which provided the Bank the opportunity to do so. Bradshaw thus participated in the arrangement which gave rise to the failure to pay HBP's taxes. We are convinced it was error to hold that Bradshaw was not a "responsible person" under § 6672 in these circumstances.

As with the previous issue, the government asserts that the determination of willfulness under § 6672 is a question of law subject to de novo review, while Bradshaw argues that it is a question of fact on which the district judge's ruling can not be overturned unless it is clearly erroneous.

Some circuits have held that the ultimate issue of willfulness is subject to de novo review. United States v. McCombs, 30 F.3d at 320 (noting, however, that this is a difficult question that, in similar contexts, has divided the courts for over a century); Thibodeau v. United States, 828 F.2d at 1505-07. Our prior decisions have, however, treated this as an issue of fact. See Taylor, 69 F.3d at 417-18 (holding that the district court, sitting in review of the decision of the bankruptcy court, erred in concluding that plaintiff's failure to pay over taxes was willful because the bankruptcy court had made no findings on willfulness; we remanded for bankruptcy court findings); Denbo, 988 F.2d at 1033 (reviewing jury finding of willfulness without suggesting that the issue is other than one of fact); Burden v. United States, 486 F.2d 302, 304 (10th Cir.1973) (applying the clearly erroneous standard), cert. denied, 416 U.S. 904, 94 S. Ct. 1608, 40 L. Ed. 2d 109 (1974).

We are, of course, bound to follow such prior decisions of this court. Here, however, we conclude that the district court's finding of no willfulness by Bradshaw must be reversed regardless of whether the clearly erroneous standard or the de novo standard of review is applied.

2. Did Bradshaw "Willfully" Fail to Pay Over the 1986

Withholding Taxes and the 1985 Late Payment Penalty?

Only if Bradshaw "willfully" failed to collect or truthfully account for and pay over the 1986 taxes and the 1985 late payment penalty could he be liable under § 6672. Willfulness under § 6672 "means a voluntary, conscious and intentional decision to prefer other creditors over the Government." Denbo, 988 F.2d at 1033. "Willfulness is present whenever a responsible person acts or fails to act consciously and voluntarily and with knowledge or intent that as a result of his action or inaction trust funds belonging to the government will not be paid over but will be used for other purposes." Wright, 809 F.2d at 428 (internal quotation marks and citation omitted). In Denbo we said:

Although negligence does not give rise to section 6672 liability, " 'the willfulness requirement is ... met if the responsible officer shows a "reckless disregard of a known or obvious risk that trust funds may not be remitted to the government...." ' " Smith v. United States, 894 F.2d 1549, 1554 n. 5 (11th Cir.1990) (quoting Thibodeau, 828 F.2d at 1505). A responsible person's failure to investigate or to correct mismanagement after being notified that withholding taxes have not been paid satisfies the section 6672 willfulness requirement. [Citation omitted].

988 F.2d at 1033.

Such is the case here. The district court found that Bradshaw repeatedly requested the Bank to pay the taxes. Findings at 6. It is clear that Bradshaw knew the taxes were unpaid. Moreover, Bradshaw's testimony at trial indicates that at the time the Agreement was negotiated and executed he was concerned with the payment of payroll taxes. And, as noted, Bradshaw's decision to enter the Agreement raised the specter that other creditors would be favored over the government. As in Kalb, Bradshaw "not only knew of but negotiated the arrangement with the bank under which other creditors were preferred to the government. He participated in the arrangement by signing checks while knowing that withholding taxes were not being paid." Kalb, 505 F.2d at 511.8 Entering the Agreement was a knowing and intentional step which created the possibility that other creditors would be favored over the government.

When the Bank refused to approve checks for the taxes, Bradshaw could have resigned or refused to sign any checks and shut down HBP. His decision to stay on, continue the business, and pay other creditors after the Bank's refusal to approve payment of the taxes, when considered in light of the Agreement, leads to the conclusion that his failure to pay the 1986 withholding taxes and the 1985 late payment penalty was willful. The district court's finding to the contrary was clearly in error.

Accordingly, we REVERSE the judgment of the district court with respect to plaintiff Bradshaw's liability under 26 U.S.C. § 6672 of $27,764.54, found traceable to the tax assessment by the district judge as reflected in his December 23, 1993, order noted. The judgment in plaintiff's favor as to the remaining $6,814 awarded him because of his overpayment of tax is not disturbed. We REMAND the case with directions to enter judgment for the United States in accordance with this opinion.

On consideration of the petition for rehearing and the response, the court finds and concludes as follows:

In his petition Bradshaw asserts that "[t]he Court should have relied upon the 1986 Liquidation Agreement inasmuch as it is this agreement which controlled and dictated the relationship between Heritage and Zions Bank, during the period in which withheld employee taxes for the first, second and third quarters of 1986 were due and payable." Petition for Rehearing at 15. He argues that this 1986 Liquidation Agreement superseded the May 1985 Agreements and that under this "controlling" Liquidation Agreement he is not a responsible person.

Fourth Quarter 1985 Penalty and First and Second Quarter 1986 Taxes

Because the Liquidation Agreement was not executed until August 6, 1986, Bradshaw cannot rely on it as to any taxes or penalties accruing prior to that date. Therefore the Liquidation Agreement is irrelevant to Bradshaw's failure to pay the fourth quarter 1985 penalty and first and second quarter 1986 taxes. Rather the May 1985 agreement was the operative agreement in place when those obligations accrued. However, as we explained in our opinion, Bradshaw cannot use the May 1985 agreement to excuse his failure to pay the taxes.1

As for the third quarter 1986 taxes, even assuming Bradshaw can rely on the August 6, 1986 Liquidation Agreement, he was still a responsible person under § 6672.

Bradshaw asserts that "Heritage could not remit withholding taxes due on employee wages for the first, second, and third quarters of 1986 because Heritage assets were completely controlled by Zions Bank, and Zions Bank would not release funds for payment of such taxes despite Zions Bank's obligation to do so under the 1986 Liquidation Agreement and Bradshaw's repeated requests." Petition at 11 (emphasis added). The relevant paragraphs of the Liquidation Agreement provide as follows (the term "Borrowers" refers to Bradshaw, the various Heritage entities, and R. Lamar Bradshaw; "Zions" refers to the Bank).2 Bradshaw asserts that the deletion of the last sentence of *1185p 12 (which had said "The individual Borrowers may have personal liability for such taxes") "clearly illustrates the intent to remove the personal liability for the taxes from the individual borrowers and require payment of the taxes through the provisions stated in paragraphs 20 and 30." Petition for Rehearing at 7 (emphasis in original). He concludes "under the controlling 1986 Liquidation Agreement, Heritage was to have access to liquidation proceeds in order to remit the withheld employee taxes. The power of Zions Bank to refuse to honor checks made payable to the Internal Revenue Service was not a power ceded to Zions Bank by Bradshaw or any one else on the part of Heritage, through this or any other agreement." Petition for Rehearing at 7-8 (emphasis in original). We disagree.

As noted in our opinion, the power to refuse to honor checks made payable to the IRS was ceded to the Bank by Bradshaw through the May 1985 agreement. See maj. op. at 1180. Moreover, Bradshaw misinterprets the Liquidation Agreement. He reads pp 12, 20 and 30 to mean that "the first obligation to be satisfied from the assets of Heritage was the remittance of any tax obligations of Heritage." Petition for Rehearing at 7. However, nowhere in these or any other provisions of the Liquidation Agreement does the Bank agree to honor checks to pay the taxes.3 In light of Bradshaw's knowledge that the taxes were not being paid and that the Bank had refused his previous requests to approve checks to the IRS, Bradshaw could have insisted on such a provision. He did not. Thus, there is nothing in the Liquidation Agreement which absolves Bradshaw of his obligation to see that the taxes were paid. Therefore, for the third quarter 1986 taxes Bradshaw was a "responsible person."

Bradshaw states that he "insisted on the inclusion in the 1986 Liquidation Agreement of provisions for the payment of taxes, with the full knowledge that like provisions were not provided in the May 1985 Agreements" and that he "operated under the belief that as negotiated and agreed to, those taxes would be paid as funds became available through Zions Bank's liquidation of Heritage assets." Petition for Rehearing at 13. Therefore, he argues, he "did not at any point make a voluntary, conscious and intentional decision to not effect payment of the withheld taxes to the United States." Id. We disagree.

For the fourth quarter 1985 penalty and the first and second quarter 1986 taxes, Bradshaw's voluntary agreement to cede power over the accounts to the Bank in the event of default, coupled with his knowledge that other creditors were being paid when the IRS was not, is sufficient to make his failure to pay the taxes willful. As for the third quarter 1986 taxes, there is nothing in the Liquidation Agreement which requires the Bank to pay the taxes from the liquidation proceeds. Instead, it was Bradshaw and the other Borrowers, who agreed to pay the taxes out of the proceeds. Liquidation Agreement p 30, Appellee's Supplemental Appendix at 92. There is nothing in the Liquidation Agreement that alters the Bank's power to refuse to honor checks to the IRS. Bradshaw could have insisted on such a provision, but did not. His failure to do so in the face of his knowledge of the unpaid tax obligations satisfies us that he voluntarily and consciously failed to pay the third quarter taxes, and therefore his failure to pay was willful.

Finally, as noted in our opinion, Bradshaw could have resigned and shut down the business when the Bank refused to approve the payment of the taxes. Instead he voluntarily continued to conduct business, and later carried out the liquidation of the business, with full knowledge of the unpaid taxes. We are convinced that his failure to pay the taxes was willful.

Accordingly, the petition for rehearing is DENIED.