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USCA1 Opinion
October 30, 1992
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 92-1061
SAMUEL V. SOTIR AND
NORMAN P. JOHNSON,
Plaintiffs, Appellants,
v.
UNITED STATES OF AMERICA,
Defendant, Appellee.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Robert E. Keeton, U.S. District Judge]
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Before
Torruella, Cyr, and Boudin, Circuit Judges.
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Carl Emmett Baylis was on brief for appellants.
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Christine A. Grant, Attorney, Department of Justice, with whom
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A. John Pappalardo, United States Attorney, James A. Bruton, Acting
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Assistant Attorney General, Gary R. Allen, Attorney, Department of
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Justice, and Richard Farber, Attorney, Department of Justice, were on
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brief for appellee.
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BOUDIN, Circuit Judge. The sole question presented on
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this appeal is whether, when a taxpayer with several tax
liabilities sends a payment to the Internal Revenue Service
but fails to specify the liability to which the payment
applies, the IRS may apply the payment to the liability it
chooses. In agreement with the district court in this case
and in accord with other circuits, we hold that the IRS may
make this choice.
Samuel V. Sotir and Norman P. Johnson were officers,
directors and shareholders of R & M Industries, Inc. ("R &
M"), a Massachusetts corporation. The corporation incurred
two forms of tax liability at issue here. First, pursuant to
26 U.S.C. 3102, 3402, the corporation withheld from its
employees' wages both social security ("FICA") taxes and
federal income taxes. Employers are required to hold these
withheld funds "in trust for the United States," 26 U.S.C.
7501(a), and thus the taxes are sometimes referred to as
"trust-fund" taxes. See United States v. Energy Resources
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Co., Inc., 495 U.S. 545, 546-547 (1990). Second, FICA being
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a tax imposed separately on both the employer and the
employee, R & M was liable for its own share of FICA taxes.
The corporation withheld FICA and federal income taxes
from the wages of its employees during the four quarters of
1986 and the first two quarters of 1987. However, with the
exception of two small payments made in the second and third
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quarters of 1986, the corporation failed to remit to the IRS
the withheld amounts as required by law. Consequently,
pursuant to 26 U.S.C. 6672(a), authorities assessed
penalties against Sotir and Johnson equal to $146,559.83, the
unpaid balance of the withheld trust-fund taxes. When
employers fail to pay trust-fund taxes, then under section
6672(a) "the government can collect an equivalent sum
directly from the officers or employees of the employer who
are responsible for their collection and payment." In re
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Energy Resources Co., 871 F.2d 223, 225 (1st Cir. 1989),
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aff'd sub nom. United States v. Energy Resources Co., Inc.,
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495 U.S. 545 (1990). Sotir and Johnson both concede that
they are such responsible persons.
After the assessments were made against Sotir and
Johnson, R & M sent payments to the IRS totaling $57,587.61
drawn on the corporate account. The corporation did not
designate whether these payments should be applied to its
trust-fund tax liability or to the corporation's liability
for its own share of the FICA taxes. "IRS policy has long
permitted a taxpayer who `voluntarily' submits a payment to
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the IRS to designate the tax liability (i.e., `trust fund' or
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non-trust fund tax debts) to which the payment will apply."
In re Energy Resources Co., 871 F.2d at 227.
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Upon receiving the undesignated payments, the IRS
allocated $41,492.26 to the trust-fund tax portion of the
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corporation's liabilities and allocated the remaining
$16,095.35 to the non-trust-fund tax liability. Sotir and
Johnson claimed in the district court that the IRS erred as a
matter of law in failing to apply all of the payments to the
corporation's trust-fund tax liability, which would have
reduced their own personal liability resulting from
assessments made under section 6672(a). The district court
rejected their position and so do we. Their position is
inconsistent with the governing general rule, and we are
unpersuaded by their attempt to avoid that rule by
interposing a recent Supreme Court decision.
When a taxpayer makes a voluntary payment without
indicating the liability to which the payment is to be
applied, ordinarily the IRS may apply the payment to
whichever liability of the taxpayer it chooses. See Davis v.
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United States, 961 F.2d 867, 878 (9th Cir. 1992); Wood v.
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United States, 808 F.2d 411, 416 (5th Cir. 1987); Muntwyler
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v. United States, 703 F.2d 1030, 1032 (7th Cir. 1983). See
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also Rev. Rul. 79-284, 1979-2 C.B. 83. This rule has been
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approved in several circuits, no contrary authority is cited
to us, and we follow that rule here. The rule applied in tax
cases accords with the broader convention that when a debtor
has more than one debt owing to a creditor, "the debtor or
party paying the money may, if he chooses to do so, direct
its appropriation; if he fail, the right devolves upon the
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creditor." National Bank of the Commonwealth v. Mechanics'
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National Bank, 94 U.S. 437, 439 (1876).
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In this case, when the IRS received the tax payments
from R & M without any direction as to their application, the
IRS applied a portion ($16,095.35) to R & M's own tax
liability for FICA taxes. To this extent, its action was
consistent with its ordinary policy of first allocating
undesignated payments to cover non-trust-fund liabilities.
See IRS policy statement P-5-60, May 5, 1984, reprinted in 1
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Internal Revenue Manual (CCH), at 1305-14. "Obviously it is
normally to the IRS's best interest to apply payments to that
part of the corporate debt that is not secured by the trust
obligation of its `responsible' officers. The IRS policies
designed to maximize the public fisc by collecting all taxes
due are entitled to great weight." New Terminal Stevedoring,
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Inc. v. M/V Belnor, 728 F. Supp. 62, 65 (D. Mass. 1989).
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Sotir and Johnson, of course, do not object to the IRS's
allocation of over two-thirds of the R & M payment to its
trust-fund tax liability, an apparent deviation from the
IRS's ordinary policy that is unexplained in the record but
favored their interests. Rather they contend that it was
error for the IRS to apply any portion--here, $16,095.35--of
the payments to the corporation's own tax liability while its
trust-fund tax liability remained unpaid. On this appeal,
Sotir and Johnson argue that the general rule giving the IRS
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discretion to allocate undesignated payments has been
altered, at least where trust-fund taxes are involved, by the
Supreme Court's decision in Begier v. Internal Revenue
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Service, 496 U.S. 53 (1990).
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The argument, although inventive, is without force. In
Begier, a taxpayer made certain payments of trust-fund taxes
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to the IRS--including both excise taxes collected from
customers and income and FICA taxes withheld from employees--
within 90 days before filing a bankruptcy petition. Id. at
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56. The bankruptcy trustee thereafter filed an action
against the IRS to "avoid" (that is, to recover for the
estate) those payments to the IRS as a "preference" under 11
U.S.C. 547(b). Id. That section provides in relevant part
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that a transfer of its property by a debtor to pay a prior
debt, where the transfer occurs within 90 days before the
debtor files a bankruptcy petition, is recoverable by the
trustee in bankruptcy. The reason is to prevent a preference
to the creditor as against other claimants to the estate.
The Supreme Court held in Begier that, under the
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Bankruptcy Code, the payments could not be avoided because
they were not made from property of the taxpayer, but rather
from funds held in trust for the government pursuant to 26
U.S.C. 7501. Id. at 67. The Court declared that even
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though the funds had not been segregated by the taxpayer, a
"trust" had arisen "within the meaning of 7501" at the
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moment that the excise taxes were collected from customers
and FICA and income taxes withheld from employees' wages.
Id. at 61-62. This alone did not resolve the case because
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the payments themselves could not be traced back under common
law tracing principles to any particular funds of the
taxpayer; but, relying primarily on Bankruptcy Code
legislative history, the Supreme Court decided that "the
debtor's act of voluntarily paying its trust-fund tax
obligation . . . is alone sufficient to establish the
required nexus between the `amount' held in trust and the
funds paid" to the IRS. Id. at 66-67.
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Sotir and Johnson argue that in this case, as in Begier,
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the payments to the IRS by the corporation were derived from
funds held in trust and thus the IRS, without any direction
from the corporation, should have applied the payments to
cover the trust-fund tax liabilities. Unfortunately for this
argument, the point of departure in Begier was the taxpayer's
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designation, by agreement with the IRS, that all of the
payments in that case would be allocated to "specific trust-
fund tax obligations" of the taxpayer. Id. at 56. In
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substance, Begier gave effect to this designation, made at
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the time of payment, in order to classify the funds used in
payment as trust-fund taxes, thereby shielding the payments
from avoidance as preferences. In the present case, by
contrast, R & M made no designation when it made its payment
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to the IRS. Indeed, it is the failure to do so that has
landed Sotir and Johnson in their present predicament.
The Supreme Court's analysis in Begier related solely to
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the impact of a taxpayer designation upon the status of
payments under the preference provision of the Bankruptcy
Code, a provision in no way involved in the present case.
Begier did not, either by reasoning or result, address the
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question of how the IRS should allocate payments made by a
taxpayer who fails to make a designation. It is almost
unnecessary to add that nowhere in Begier did the Supreme
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Court suggest any intent to overturn the line of decisions
allowing the IRS, absent some direction from the taxpayer, to
apply payments to whichever of the taxpayer's liabilities it
wishes. That line of decisions disposes of this case.
The judgment of the district court is affirmed.
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Document Info
Docket Number： 92-1061
Filed Date： 10/30/1992
Precedential Status： Precedential
Modified Date： 9/21/2015