## Facts

- CDI Homes, Inc. (CDI), a construction company, financed operations through a $1 million revolving credit line from Fidelity Bank, N.A. (Fidelity).
- Payments owed to CDI under a housing contract were deposited into an escrow account at Fidelity and disbursed under a preset formula, with remaining funds available to CDI.
- Fidelity permitted CDI to overdraw its account in anticipation of incoming contract payments; a bank officer reviewed and initialed checks before honoring them.
- Payroll checks were marked “PAYROLL” and were honored as part of the overdraft/credit arrangement.
- For the second quarter of 1973, CDI withheld federal income and FICA taxes from employee wages but did not remit $36,150.42 in those trust-fund taxes.
- Shortly before CDI ceased operations, Fidelity dishonored certain tax-payment checks while continuing to honor payroll checks.
- The IRS assessed Fidelity for a 100% penalty under I.R.C. § 6672 and also asserted liability under I.R.C. § 3505(b) for allegedly funding wages with knowledge CDI would not pay withholding taxes.
- Fidelity paid a small portion of the assessment and sued for a refund; the United States counterclaimed for the unpaid balances under §§ 6672 and 3505(b).
- A jury found for Fidelity on the refund claim and against the government on both counterclaims; the district court denied JNOV and awarded Fidelity attorney’s fees under 42 U.S.C. § 1988.

## Issues

1. Whether Fidelity was liable under I.R.C. § 6672 as a “responsible person” who “willfully” failed to collect, account for, or pay over CDI’s trust-fund taxes.
2. Whether Fidelity was liable under I.R.C. § 3505(b) as a lender that supplied funds for wages with actual knowledge CDI did not intend or could not pay the associated withholding taxes.
3. Whether the trial court erred by placing the burden of persuasion on the government for its § 6672 counterclaim.
4. Whether attorney’s fees were properly awarded to Fidelity under 42 U.S.C. § 1988 absent findings that the government’s position was frivolous, unreasonable, or groundless.

## Decision

- The Tenth Circuit affirmed the judgment for Fidelity on the §§ 6672 and 3505(b) liabilities, holding the evidence supported the jury’s verdict and JNOV was properly denied.
- The court held the jury could reasonably find Fidelity was not a § 6672 “responsible person” and did not act “willfully” within the statute.
- The court held the jury could reasonably find § 3505(b)’s “actual knowledge” element was not proven.
- The court upheld the jury instruction placing the burden of persuasion on the government as to its § 6672 counterclaim.
- The court addressed the standards governing fee awards under § 1988, focusing on the requirement that a prevailing defendant ordinarily must show the government’s position was frivolous or unreasonable.

## Legal Principles

- I.R.C. § 6672 liability requires proof that the defendant (1) had a duty and significant authority to ensure trust-fund taxes were paid (responsible-person status) and (2) voluntarily and intentionally preferred other payments over the United States, or acted with reckless disregard (willfulness).
- A commercial lender’s leverage over disbursements, including check review and overdraft practices, does not alone establish § 6672 responsible-person status absent a genuine duty or authority to collect and pay over the employer’s taxes.
- I.R.C. § 3505(b) requires proof that a lender supplied funds for the specific purpose of paying wages and did so with actual knowledge the employer did not intend or would not be able to pay withholding taxes; suspicion or generalized awareness of financial distress is insufficient.
- When the government seeks to impose § 6672 liability through its own claim or counterclaim, it bears the burden of persuading the factfinder on responsible-person status and willfulness.
- Under 42 U.S.C. § 1988, a prevailing defendant generally may recover attorney’s fees only if the government’s position was frivolous, unreasonable, or groundless.

## Conclusion

The Tenth Circuit sustained a jury verdict rejecting trust-fund tax liability against a bank that financed a borrower’s payroll through a lending and escrow arrangement, holding the evidence did not compel findings of § 6672 responsibility and willfulness or § 3505(b) actual knowledge, and confirming that the government carried the burden of proof on its § 6672 counterclaim.


Fidelity Bank, N.A. v. United States, 616 F.2d 1181 (10th Cir. 1980)