Trust Fund Recovery
Penalty (100% Penalty)
US-CT-APP-9, [97-1 USTC ¶50,290], Henry D.
Buffalow, Jr., Plaintiff-Counter-Claim-Defendant-Appellant v. United
States of America, Defendant-Counter-Claimant-Appellee , Trust fund
recovery penalty: President: Sole shareholder: Responsible person:,
(Mar. 20, 1997)
[97-1 USTC ¶50,290] Henry
D. Buffalow, Jr., Plaintiff-Counter-Claim-Defendant-Appellant v. United
States of America, Defendant-Counter-Claimant-Appellee
(CA-9), U.S. Court of Appeals, 9th Circuit, 95-17089, 3/20/97, 109 F3d
109 F3d 570.
Sec. 6672 ]
Trust fund recovery penalty: President: Sole shareholder: Responsible
person: Willfulness: Rescue operations.--A president and sole
shareholder of a company who made a plan to liquidate the company in an
effort to secure a payment
for the company's unpaid withholding taxes was liable for the trust fund
recovery penalty because he was a responsible person who willfully
failed to pay
over withholding taxes. Although he informed the IRS of his plan, he
paid other creditors, as part of the plan, while he knew the withholding
taxes were unpaid. Although he was trying to ultimately rescue something
for the IRS, the president, who was a continuing responsible person, was
the one conducting the rescue operations. Further, even though an IRS
revenue officer, whom the president notified of the plan by a letter,
did not dissuade him of his course of action, the letter was
insufficient to estop the government because it was not accepted in
writing. BACK REFERENCES: ¶40,580.853
Sec. 6672 ]
Trust fund recovery penalty: Payments:
Misapplied.--Although the IRS erroneously credited a payment
made by a company that was specifically allocated to a certain year's
tax liabilities to another year's trust fund taxes, the misallocation
did not extinguish the trust fund liability. It was the company's
designation, not the IRS's accounting entry, that would have
extinguished the tax assessment. Further, the IRS had the authority to
allocate undesignated payments
made by the company to non-trust fund liabilities. BACK REFERENCES: ¶40,580.075
David M. Kirsch, 160 Santa
Clara St., San Jose, Calif., for
plaintiff-counter-claim--defendant-appellant. Gary R. Allen, David I.
Pincus, Department of Justice, Washington, D.C. 20530, for
FERNANDEZ, and HAWKINS, Circuit Judges.
Henry D. Buffalow, Jr.
appeals from the district court's judgment in favor of the United States
in which the court determined that he was responsible for the payment
of a penalty because of the failure to pay
over taxes withheld from employees' wages by Buffalow's, Inc. in 1989
and 1990. He asserts that he is not responsible for the penalty because
his failure to pay
the taxes was not willful and because various tax payments,
which were made, were improperly allocated by the Internal Revenue
Service. We affirm.
Buffalow was the president
and the sole shareholder of Buffalow's, Inc. In the latter part of 1990,
he discovered that the company was having cash flow problems, and he
asked the company's controller to prepare a report of accounts payable,
including any unpaid tax obligations. The controller did so, but did not
tell Buffalow that there were unpaid federal employment tax liabilities.
The controller then left the company and disappeared.
After the controller left,
Buffalow received a notice from the Internal Revenue Service which
indicated that the company had not paid to the United States the
employee withholding taxes for the last quarter of 1989 and the first
two quarters of 1990. He investigated, and by the end of February or
beginning of March 1990 he discovered that the IRS was correct. For that
reason, among others, he determined that the company could not survive
and would have to be closed.
The company, however, did
have some valuable assets in the form of preventative maintenance
contracts and a customer list. As he saw it, those assets would have
zero value if the company simply closed its doors immediately. He
decided that the wisest economic plan for all concerned was to keep the
company in operation while he found buyers for those assets. Once the
assets were sold, the secured debts could be paid, and what was left
could be allocated to the tax liabilities. Of course, if the company
were to stay open, amounts would have to be paid out for vendors and for
operating expenses (including current wages) during the interim.
Obviously, that money would not go to discharge the employee withholding
tax debt, and that is where Buffalow's personal tax woes began.
Buffalow wrote to the IRS
revenue officer and explained what he planned to do. She did not warn
him that he was stepping into a tax quagmire. Instead, she simply asked
him to keep her informed and to keep up payment
of the ensuing payroll taxes for sure. He proceeded to carry out his
plan and had some success.
The company did stay afloat
long enough to sell some assets, pay
current taxes, repay the secured debt, and pay
about $100,000 on the company's accrued tax liabilities. One payment
of $50,000 was expressly designated
by the company for application to its 1990 tax liabilities. The IRS
mistakenly attempted to apply the payment
to the 1989 employee withholding tax liabilities, but when Buffalow
brought the error to its attention, it applied the sum to the company's
1990 employee withholding tax liabilities instead. The remainder of the payments
were not designated
to any particular tax account. Thus, the IRS allocated those in a way
that aided the fisc, that is, it applied them first to the liabilities
other than those for employee withholding taxes.
Once the dust had settled,
the IRS assessed Buffalow personally for the unpaid employee withholding
tax liabilities on the theory that he was a responsible officer who had
willfully failed to pay
over those taxes. He paid a portion of the liability and then brought
this action for a refund. The United States counterclaimed to recover
the unpaid portion of the assessments. On cross motions for summary
judgment, the district court found in favor of the United States, and
this appeal ensued.
JURISDICTION AND STANDARD OF REVIEW
The district court had
jurisdiction pursuant to 28 U.S.C. §§1340 and 1346(a)(1). We have
jurisdiction pursuant to 28 U.S.C. §1291.
We review the district
court's grant of summary judgment de novo. See Bagdadi v. Nazar,
84 F.3d 1194, 1197 (9th Cir. 1996); Warren v. City of Carlsbad,
58 F.3d 439, 441 (9th Cir. 1995), cert. denied, -- U.S. --, 116 S. Ct.
1261, 134 L. Ed. 2d 209 (1996).
Buffalow attacks the district
court's judgment on two fronts. First, he asserts that he should not be
personally liable for the unpaid employer withholding taxes at all. See
26 U.S.C. §6672. 1
Second, he asserts that even if he could have personal liability of some
kind, the payments
which were made by the company were improperly allocated by the IRS.
Neither of his arguments is based upon a proper interpretation of the
A. Responsible Person
Employers are required to
withhold federal taxes from employee wages. See §§3102(a), 3402(a).
When they do so, they hold the money in trust for the United States and
must then pay
the money over to the government on a quarterly basis. See §7501(a).
Those withheld amounts are known as trust fund taxes. See Davis v.
United States [92-1 USTC ¶50,292], 961 F.2d
867, 869 (9th Cir. 1992). Other taxes owed by an employer are known as
non-trust fund taxes. Id.
Because the trust fund taxes
seem to be a source of ready cash, it sometimes happens that a company,
which has cash flow difficulties, will draw upon them rather than paying
them over to the government. If the tax liability were only that of the
company, the government could suffer substantial losses when companies
fail. That is because the employees must be credited with the withheld
amounts in any event. See id. Therefore, Congress enacted §6672, which
provides, in pertinent part:
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 . . . 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.
This is referred to as the responsible person penalty provision.
Buffalow concedes that he is
a responsible person; however, that is not enough to fix liability upon
him. He must also have willfully failed to pay
over the trust fund taxes, but he says that his failure was not willful.
While he makes an appealing theoretical argument, he is in error because
he confuses his motives with his actions.
To some willfulness sounds
like a word which contains a suggestion of moral evil. It does not.
"We have construed the term 'willfulness' for purposes of failing
over withholding taxes as a 'voluntary, conscious and intentional act to
prefer other creditors over the United States.' No bad motive need be
proved, and conduct motivated by reasonable cause, such as meeting the
payroll, may be 'willful.' " Phillips v. United States IRS [96-1
USTC ¶50,057], 73 F.3d 939, 942 (9th Cir. 1996)
(citations omitted); see also Jones v. United States [95-2 USTC
¶50,373], 60 F.3d 584, 587-88 (9th Cir. 1995); Klotz v. United
States [79-2 USTC ¶9552], 602 F.2d 920, 923
(9th Cir. 1979); Teel v. United States [76-1 USTC
¶9190], 529 F.2d 903, 905 (9th Cir. 1976). Undoubtedly, the standard is
a harsh, even somewhat counterintuitive one, but it is the law. As we
If a responsible person knows that withholding taxes are
delinquent, and uses corporate funds to pay
other expenses, even to meet the payroll out of personal funds he
lends the corporation, our precedents require that the failure to pay
withholding taxes be deemed "willful." This may seem
oppressive to the employer and employees, and amount to
"unwittingly" willful, which seems an oxymoron, but the
proposition is established law.
USTC ¶50,057 ], 73 F.3d at 942 (citations omitted).
Buffalow ran afoul of this
body of law when he made a deliberate, if in many ways sound, decision
other creditors while he knew that the trust fund liability was
outstanding and unpaid. See Purcell v. United States [93-2 USTC
¶50,460], 1 F.3d 932, 938 (9th Cir. 1993). He does not deny that he did
What Buffalow does claim is
that he was trying to ultimately rescue something for the government,
and his acts should not be considered willful because rescue operations
should be encouraged. For that proposition he cites a Supreme Court
case. See Slodov v. United States [78-1 USTC
¶9447], 436 U.S. 238, 98 S. Ct. 1778, 56 L.Ed.2d 251 (1978) (holding
that new management is not liable under §6672 for trust fund
delinquencies in existence at the time the new management took control).
But we have thoroughly discussed that case and have firmly excluded its
application to a situation where a continuing responsible person, like Buffalow,
is the one who is conducting the rescue operations. See Davis
[92-1 USTC ¶50,292], 961 F.2d at 871-78; see
also Purcell [93-2 USTC ¶50,460], 1 F.3d
Finally, Buffalow seeks a
kind of estoppel against the United States because the IRS revenue agent
did not dissuade him from his proposed course and even seemed to tacitly
approve of it. Unfortunately for Buffalow, it takes much more than that
to bind the government. Buffalow's letter to the revenue officer could
not have been a true settlement with the government because it was not
accepted in writing. See §7121; §7122; 26 C.F.R. §301.7122-1(d). If
Buffalow made a mistake in that regard, his mistake cannot save him. See
Teel [76-1 USTC ¶9190], 529 F.2d at 906
(a mistaken belief that the tax need not be paid "does not suffice
to render the failure to pay
nonwillful"). Beyond that, what we said in Purcell applies here:
"We are sympathetic to [his] plight. "[93-2 USTC
¶50,460], 1 F.3d at 940. However, at most the revenue officer "
'encouraged' him to keep the business going, and behaved in a manner
that led him to believe that the IRS would not seek to hold him
personally responsible for the . . . taxes. This testimony at best
established a mere omission or negligent failure on[the revenue
officer's] part." Id. (footnote omitted). That will not suffice to
estop the government. Id. Thus, Buffalow is a responsible person who
willfully failed to pay
over trust fund taxes, which were due.
Buffalow's other attack
revolves around the allocation of payments
made by the company. It has two components, neither of which is
(1) Misallocation of Designated
When the company made one of its tax payments,
it specifically designated
for application to 1990 liabilities. The IRS accidentally credited part
of the payment
to the 1989 trust fund liabilities, but corrected that when the error
was brought to its attention. Buffalow now asserts that, because the IRS
to the 1989 account, that assessment was discharged. He is wrong.
We start with the undeniable
proposition that a taxpayer can designate the account to which a tax payment
is to be applied and that the IRS must follow that designation. See Tull
v. United States [95-2 USTC ¶50,602], 69
F.3d 394, 396-97 (9th Cir. 1995); United States v. Technical Knockout
Graphics, Inc., (In re Technical Knockout Graphics, Inc.)
[87-2 USTC ¶9645], 833 F.2d 797, 799 (9th Cir.
1987). In fact, when the IRS has failed to do so, we have directed that
the error be corrected. See Tull [95-2 USTC
¶50,602], 69 F.3d at 399. Buffalow, however, argues that the initial
misallocation extinguished the 1989 liability. That misapprehends what a
misallocation is by assuming that what extinguishes a tax is the act of
the IRS rather than the designation by the taxpayer.
We agree with the First
Circuit's view that it is the taxpayer's designation, not the IRS's
accounting entry, which extinguishes the tax assessment. As that circuit
has said, "[W]hen a taxpayer tenders payment
on a tax assessment, that payment
extinguishes the assessment to the extent of the payment."
Clark v. United States [95-2 USTC ¶50,469],
63 F.3d 83, 87 (1st Cir. 1995). In Clark, the IRS had mistakenly applied
designated for the taxpayer's 1986 account to his 1985
account. He later claimed that the crediting had extinguished the 1985
assessment. The court disagreed. As it said, "[A]ssessments may
only be extinguished by payment
tendered by the taxpayer, and not by an IRS error." Id. at 89. As a
result, the 1985 assessment was alive and well, and the IRS was entitled
to collect it. Id.; see also O'Bryant v. United States [95-1 USTC
¶50,143], 49 F.3d 340, 345-46 (7th Cir. 1995); United States v.
Wilkes [91-2 USTC ¶50,565], 946 F.2d 1143,
1152 (5th Cir. 1991); United States v. Young [79-2 USTC
¶9609], at 88,221 (D. Del. 1979); Nitsos v. United States [58-1 USTC
¶9491], (CCH) at 68,325 (S.D. Ala. 1958).
Surely, that is a sensible
view of the matter. The mere allocation has no final effect; the
designation does. We have said as much in a similar situation. In Davis
[92-1 USTC ¶50,292], 961 F.2d at 878, the
taxpayer had made no designation whatever, but the IRS first allocated
to the trust fund assessment. Later, the IRS changed its mind and
reallocated the payment
to a non-trust fund assessment. We declared that the responsible person
taxpayer could not complain about that because, among other things, the
IRS's initial allocation decision should not straightjacket it, and
because the taxpayer could not show any cognizable injury. Id. at
879-80. Surely, if allocations of undesignated payments
do not bind the IRS, misallocations of designated
payments cannot do so. Therefore, Buffalow cannot complain
about the fact that he remains responsible for the 1989 trust fund
liability, which was never extinguished by payment
by the company.
(2) Allocation of
The second component of Buffalow's attack has much less merit. He
complains about the IRS's allocation of undesignated payments
to non-trust fund liabilities, an act which, of course, increased his
liability as the person responsible for the unpaid trust fund taxes. He
says that is unfair, but his argument is foreclosed by settled law. See Davis
[92-1 USTC ¶50,292], 961 F.2d 878; see also United
States v. Schroeder [90-1 USTC ¶50,250], 900
F.2d 1144, 1149 (7th Cir. 1990); Wood v. United States [87-1 USTC
¶9165], 808 F.2d 411, 416 (5th Cir. 1987); cf. Tull [95-2 USTC
¶50,602], 69 F.3d at 397 (involuntary payments
can be applied by the IRS as it sees fit). The IRS consciously and
consistently follows that approach because it maximizes tax collections.
See Rev. Rul. 79-284, 1979-2 C.B. 83 (modifying Rev. Rul. 73-305). The
fact that it also maximizes responsible person liability is unfortunate
for Buffalow, but it is a misfortune the company, and he, could easily
have avoided by giving an allocation instruction to the IRS.
Buffalow claims that the IRS
misled him; unfortunately for him, the fact is that he failed to con
federal tax law. We do not say that Buffalow had a bad heart. But the
tax engine is blindly voracious; it does not always look into a man's
heart before it devours him.
As it was, Buffalow's
problems were not caused by some contretemps; they followed his actions
as the night the day. He is liable because he did pay
other creditors before he saw to the payment
of trust fund liabilities as to which he was a responsible person. It is
true that his liability might have been lowered, had the company
directed other allocations of its tax payments.
But, as it sadly enough turned out, the company's allocations and
failures to allocate inured to Buffalow's ultimate detriment. That too
should have been foreseen. In short, he did not turn square enough
when he dealt with the IRS, and we must once again embrace the result of
a "responsible person" case with velleity. 3
Hereafter all statutory references are to 26 U.S.C., unless otherwise
See Rock Island, Ark. & La. R.R. Co. v. United States [1 USTC
¶38], 254 U.S. 141, 143, 41 S. Ct. 55, 56, 65 L. Ed. 188 (1920).
See Phillips [96-1 USTC ¶50,057], 73 F.3d
at 943; James [95-2 USTC ¶50,373], 60
F.3d at 588. Counterintuitive as it seems, Buffalow might well have been
better off had he shut down the company immediately rather than making a
good faith effort to maximize the money available to all creditors,
including the government. Cases like this one do not send a very
edifying message to businesses and their lawyers.
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