Sotir and Johnson v. United States

• Court: Court of Appeals for the First Circuit
• Decided: October 30, 1992
• Docket: 92-1061
• Status: Published

Opinion

USCA1 Opinion

October 30, 1992
                            UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT
                                _____________________

        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]
                                             ___________________

                                 ____________________

                                        Before

                      Torruella, Cyr, and Boudin, Circuit Judges.
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                                 ____________________

            Carl Emmett Baylis was on brief for appellants.
            __________________
            Christine A.  Grant, Attorney,  Department of  Justice, with  whom
            ___________________
        A. John Pappalardo,  United States  Attorney, James A.  Bruton, Acting
        __________________                            ________________
        Assistant  Attorney General,  Gary R.  Allen, Attorney,  Department of
                                      ______________
        Justice, and Richard Farber, Attorney,  Department of Justice, were on
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        brief for appellee.

                                 ____________________

____________________

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
                                  ___  _____________     ________________

            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),
            _____________________

            aff'd sub nom.  United States v. Energy Resources  Co., Inc.,
            _____ ___ ___   _____________    __________________________

            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.
                                                             ___ _____

            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
            ____

            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'
                         __________________________________    _________

            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
            ___                                            ____________

            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).
            ___     __________

                 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
                                            ______      _________________

            Service, 496 U.S. 53 (1990).
            _______

                 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
                              __

            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
                             __

            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
            __

            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.
                                     __

                 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
            ______

            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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