(CN) - The former vice president and chief financial officer of Las Vegas' defunct National Airlines personally owes more than $11 million of unpaid excise taxes, the 9th Circuit ruled.
Raymond Nakano worked as a top executive with the discount airline, which several casino owners started to attract gamblers and revelers from various points around the country to Las Vegas. National lasted from 1995 until it filed for Chapter 7 bankruptcy in 2003.
Airlines are required to pay excise taxes to the Internal Revenue Service on a quarterly basis. Shortly before filing for Chapter 11 bankruptcy in 2000, National sent $1.8 million for the third quarter of that year. Shortly thereafter, however, the airline restructured under the bankruptcy and the check was returned, leaving the taxes unpaid.
When the airline industry took a big financial hit after the Sept. 11, 2001, terrorist attacks, Congress offered the Airline Stabilization Act, which provided grants and tax deferments to struggling carriers. National received a $21 million federal grant and deferred its excise taxes once again.
The IRS came calling twice in 2002, and twice National requested a six-month extension on paying its excise taxes for three previous quarters. When the airline went under and quit flying about nine months later, the government tried unsuccessfully to collect some $11.5 million in unpaid excise taxes.
Nakano sued the IRS after the company's two administrative appeals failed and the agency had reissued its assessment, this time saying that the former CFO was personally liable for the taxes as the defunct airline's "responsible person." The government counterclaimed, and U.S. District Judge Roslyn Silver ruled for the IRS and ordered Nakano to pay.
Nakano took the issue to the 9th Circuit, arguing that his failure to pay was not "willful" because the airline's money had been "encumbered" by bankruptcy.
A unanimous, three-judge appellate panel affirmed Tuesday, leaving Nakano on the hook for the full amount.
Other circuits that have considered arguments similar to those Nakano made have determined that such funds are encumbered only if some "legal prohibition on the expenditure of funds" renders them so, according to the ruling.
"Applying that test, we conclude that plaintiff failed to satisfy his burden to show that the assets he had at his disposal as a 'responsible person' were 'encumbered' and thereby unavailable to satisfy his obligations under § 6672," Judge Susan Graber wrote for the appeals panel.
Nakano had argued that the rules of the airline's bankruptcy required him to pay operating expenses before taxes, but the panel found that "operating expenses do not gain a higher priority" over taxes under Chapter 11. Nor did the judges accept Nakano's further contention that he was not liable for the taxes deferred under the Airline Stabilization Act.
"The text of the law provides no support for the theory that Congress intended the Stabilization Act to strip trust status from collected excise taxes," Graber wrote.
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