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    Sotir and Johnson v. United States, 1st Cir. (1992)

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    This document is a summary of a 1992 appellate court case regarding whether the IRS can apply undesignated tax payments from a corporation to whichever tax liability it chooses. The court held that when a taxpayer makes a voluntary payment without indicating how it should be applied, the IRS may apply it to whichever liability it wants, including trust fund taxes and non-trust fund taxes. This is consistent with prior case law and IRS policy. The plaintiffs argued a recent Supreme Court case altered this rule for trust fund taxes, but the court found this argument unpersuasive and ruled in favor of the IRS's allocation of the payments.

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    Sotir and Johnson v. United States, 1st Cir. (1992)

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    22 views12 pages
    This document is a summary of a 1992 appellate court case regarding whether the IRS can apply undesignated tax payments from a corporation to whichever tax liability it chooses. The court held that when a taxpayer makes a voluntary payment without indicating how it should be applied, the IRS may apply it to whichever liability it wants, including trust fund taxes and non-trust fund taxes. This is consistent with prior case law and IRS policy. The plaintiffs argued a recent Supreme Court case altered this rule for trust fund taxes, but the court found this argument unpersuasive and ruled in favor of the IRS's allocation of the payments.

    Original Description:

    Filed: 1992-10-30 Precedential Status: Precedential Docket: 92-1061

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    This document is a summary of a 1992 appellate court case regarding whether the IRS can apply undesignated tax payments from a corporation to whichever tax liability it chooses. The court held that when a taxpayer makes a voluntary payment without indicating how it should be applied, the IRS may apply it to whichever liability it wants, including trust fund taxes and non-trust fund taxes. This is consistent with prior case law and IRS policy. The plaintiffs argued a recent Supreme Court case altered this rule for trust fund taxes, but the court found this argument unpersuasive and ruled in favor of the IRS's allocation of the payments.

    Copyright:

    Public Domain
    Download as PDF or read online from Scribd
    Download as pdf
    22 views12 pages

    Sotir and Johnson v. United States, 1st Cir. (1992)

    Uploaded by

    Scribd Government Docs
    This document is a summary of a 1992 appellate court case regarding whether the IRS can apply undesignated tax payments from a corporation to whichever tax liability it chooses. The court held that when a taxpayer makes a voluntary payment without indicating how it should be applied, the IRS may apply it to whichever liability it wants, including trust fund taxes and non-trust fund taxes. This is consistent with prior case law and IRS policy. The plaintiffs argued a recent Supreme Court case altered this rule for trust fund taxes, but the court found this argument unpersuasive and ruled in favor of the IRS's allocation of the payments.

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    of 12

    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.
    ____________________
    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.
    ______________
    ____________________

    Carl Emmett Baylis was on brief for appellants.


    __________________
    Christine A. Grant, Attorney, Department of Justice, with w
    ___________________
    A. John Pappalardo, United States Attorney, James A. Bruton, Act
    __________________
    ________________

    Assistant

    Attorney General,

    Gary R. Allen, Attorney, Department


    ______________
    Justice, and Richard Farber, Attorney, Department of Justice, were
    ______________
    brief for appellee.
    ____________________
    ____________________

    BOUDIN, Circuit Judge.


    ______________
    this

    appeal is

    whether, when

    liabilities sends
    but

    fails

    the

    applies,

    the IRS may apply

    chooses.

    In agreement

    question presented on

    taxpayer with

    a payment to the

    to specify

    and in accord

    The sole

    several tax

    Internal Revenue Service

    liability to

    which

    the payment to

    the liability it

    with the district court in

    with other circuits, we hold

    the payment

    this case

    that the IRS may

    make this choice.


    Samuel
    directors

    V. Sotir

    and Norman

    and shareholders of R

    P. Johnson

    were officers,

    & M Industries,

    Inc. ("R &

    M"), a Massachusetts

    corporation.

    The

    corporation incurred

    two forms of tax liability at issue here.


    26 U.S.C.

    3102, 3402, the

    employees'
    federal

    wages both

    income taxes.

    withheld

    First, pursuant to

    corporation withheld from

    social

    security

    Employers are

    its

    ("FICA") taxes

    and

    required to hold these

    funds "in trust for the United States," 26 U.S.C.

    7501(a), and

    thus

    the taxes

    "trust-fund" taxes.

    See
    ___

    are sometimes

    United States v.
    _____________

    referred to

    as

    Energy Resources
    ________________

    Co., Inc., 495 U.S. 545, 546-547 (1990).


    _________

    Second, FICA being

    a tax

    employer

    imposed

    separately

    on

    both

    the

    and

    the

    employee, R & M was liable for its own share of FICA taxes.
    The corporation withheld
    from the wages of

    its employees during the four

    1986 and the first two


    exception

    FICA and federal income

    quarters of 1987.

    taxes

    quarters of

    However,

    with the

    of two small payments made in the second and third

    -2-2-

    quarters

    of 1986, the corporation failed to remit to the IRS

    the

    withheld

    pursuant

    amounts as

    to

    26

    required

    U.S.C.

    by

    6672(a),

    law.

    Consequently,

    authorities

    assessed

    penalties against Sotir and Johnson equal to $146,559.83, the


    unpaid

    balance

    employers fail
    6672(a)

    of

    the

    to pay

    "the

    withheld trust-fund
    trust-fund taxes, then

    government

    can

    directly from the officers or


    are

    responsible for

    495 U.S. 545

    collect

    an

    When

    under section
    equivalent

    sum

    employees of the employer

    who

    their collection

    Energy Resources Co., 871


    _____________________
    aff'd sub nom.
    _____ ___ ___

    taxes.

    and payment."

    F.2d 223,

    225 (1st

    In re
    _____

    Cir. 1989),

    United States v. Energy Resources Co., Inc.,


    _____________
    __________________________
    (1990).

    Sotir and Johnson

    both concede

    that

    they are such responsible persons.


    After

    the

    Johnson, R & M
    drawn

    on the

    designate

    corporate account.

    tax liability

    own share of the

    permitted a

    were

    made

    sent payments to the

    whether these

    trust-fund
    for its

    assessments

    against

    Sotir

    and

    IRS totaling $57,587.61


    The

    corporation

    payments should
    or to the

    be applied

    did not
    to its

    corporation's liability

    FICA taxes.

    "IRS

    policy has long

    taxpayer who `voluntarily' submits


    ___________

    a payment to

    the IRS to designate the tax liability (i.e., `trust fund' or


    ___
    non-trust fund

    tax debts) to which the

    payment will apply."

    In re Energy Resources Co., 871 F.2d at 227.


    _________________________
    Upon
    allocated

    receiving

    the

    $41,492.26 to

    undesignated
    the trust-fund

    payments,
    tax portion

    the

    IRS

    of the

    -3-3-

    corporation's

    liabilities

    $16,095.35 to

    and

    the non-trust-fund

    allocated

    the

    remaining

    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
    corporation's
    reduced

    trust-fund

    their

    own

    assessments made
    rejected

    unpersuaded

    and so
    governing

    their

    which

    liability

    under section 6672(a).

    with the
    by

    liability,

    personal

    their position

    inconsistent

    tax

    attempt

    do we.

    payments to the
    would have

    resulting

    The district court


    Their

    position is

    general rule,
    to

    from

    avoid

    and we

    that

    rule

    are
    by

    interposing a recent Supreme Court decision.


    When
    indicating
    applied,

    taxpayer

    makes

    the liability
    ordinarily

    the

    to
    IRS

    voluntary

    which
    may

    the

    payment
    payment is

    apply

    the

    whichever liability of the taxpayer it chooses.


    United States, 961
    _____________

    F.2d 867,

    United States, 808 F.2d 411,

    without

    878 (9th Cir.

    to

    be

    payment

    to

    See Davis v.
    ___ _____

    1992); Wood
    ____

    416 (5th Cir. 1987);

    v.

    Muntwyler

    _____________

    _________

    v. United States,
    _____________

    703 F.2d 1030, 1032 (7th

    also Rev. Rul. 79-284,


    ____

    1979-2 C.B. 83.

    approved in several circuits,

    Cir. 1983).

    This rule has

    The rule applied in tax

    cases accords with the broader convention that when a


    than one debt

    party paying

    owing to a creditor,

    the money may, if

    its appropriation; if

    been

    no contrary authority is cited

    to us, and we follow that rule here.

    has more

    See
    ___

    "the debtor or

    he chooses to

    he fail, the

    debtor

    do so, direct

    right devolves upon

    the

    -4-4-

    creditor."

    National Bank of the Commonwealth v. Mechanics'


    __________________________________
    _________

    National Bank, 94 U.S. 437, 439 (1876).


    _____________
    In this

    case, when

    the IRS

    received the

    tax payments

    from R & M without any direction as to their application, the


    IRS

    applied

    portion

    liability for FICA


    consistent

    with

    taxes.
    its

    ($16,095.35)

    to

    To this extent,

    ordinary policy

    of

    R & M's

    own

    tax

    its action

    was

    first

    allocating

    undesignated
    See
    ___

    payments

    to cover

    non-trust-fund liabilities.

    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

    obligation of

    is not secured by the trust

    its `responsible' officers.

    designed to maximize the public

    The IRS policies

    fisc by collecting all taxes

    due are entitled to great weight."

    New Terminal Stevedoring,


    _________________________

    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

    trust-fund

    tax

    two-thirds of

    liability,

    IRS's ordinary policy


    favored their

    an apparent

    deviation

    that is unexplained in the

    interests.

    error for the IRS

    the R & M payment

    Rather they

    to its
    from the

    record but

    contend that

    it was

    to apply any portion--here, $16,095.35--of

    the payments to the corporation's own tax liability while its


    trust-fund tax
    Sotir

    liability remained

    unpaid.

    On

    this appeal,

    and Johnson argue that the general rule giving the IRS

    -5-5-

    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

    to

    both

    the

    IRS--including

    excise

    taxes

    collected

    from

    customers and income and FICA taxes withheld from employees-within 90 days before
    56.

    The

    filing a bankruptcy petition.

    bankruptcy

    those payments to the IRS as a "preference" under 11

    U.S.C.

    547(b).

    by a debtor to

    the transfer occurs

    files a

    for the

    That section provides in relevant part

    transfer of its property

    debtor

    to recover

    action

    estate)

    debt, where

    is,

    an

    the

    Id.
    __

    "avoid" (that

    filed

    against

    that a

    IRS to

    trustee thereafter

    Id. at
    __

    within 90

    bankruptcy petition,

    trustee in bankruptcy.

    pay a prior

    days before

    is recoverable

    the

    by the

    The reason is to prevent a preference

    to the creditor as against other claimants to the estate.


    The

    Supreme

    Bankruptcy Code,

    Court

    held

    the payments

    in

    Begier
    ______

    that,

    could not be

    under

    the

    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
    __

    though the funds had


    "trust"

    had arisen

    67.

    The Court

    declared that

    not been segregated by the


    "within the

    meaning of

    even

    taxpayer, a
    7501"

    at the

    -6-6-

    moment that
    and

    the excise

    FICA and

    Id. at
    __

    taxes were collected

    income taxes

    61-62.

    withheld from

    This alone

    from customers

    employees' wages.

    did not resolve the

    case because

    the payments themselves could not be traced back under common


    law

    tracing

    taxpayer;

    principles
    but,

    legislative
    debtor's
    obligation

    to

    relying

    history, the

    act
    . .

    of

    any

    primarily
    Supreme

    voluntarily
    .

    is

    required nexus between


    funds paid" to the IRS.

    particular

    alone

    on

    Court

    paying

    of

    the

    Bankruptcy

    Code

    decided that

    "the

    its

    trust-fund

    tax

    to

    establish

    the

    held in

    trust and

    the

    sufficient

    the `amount'

    funds

    Id. at 66-67.
    __

    Sotir and Johnson argue that in this case, as in Begier,


    ______

    the

    payments to the IRS by the corporation were derived from

    funds held in trust


    from

    and thus the IRS, without

    the corporation,

    should have

    any direction

    applied the

    cover the trust-fund tax liabilities.

    payments to

    Unfortunately for this

    argument, the point of departure in Begier was the taxpayer's


    ______
    designation,

    by agreement

    with

    payments in that case would be


    fund tax

    obligations" of the

    substance, Begier
    ______
    the time of
    payment
    from

    the IRS,

    that

    taxpayer.

    Id.
    __

    In
    made at

    funds used in

    thereby shielding the payments

    preferences.

    contrast, R & M made

    at 56.

    to this designation,

    payment, in order to classify the

    avoidance as

    the

    allocated to "specific trust-

    gave effect

    as trust-fund taxes,

    all of

    In

    the

    present case,

    by

    no designation when it made its payment

    -7-7-

    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
    ______

    the

    impact

    payments

    of a

    taxpayer

    under the

    Code, a provision
    Begier did not,
    ______
    question

    in no

    way involved in

    either by reasoning

    of

    the

    the present

    suggest any intent

    case.

    or result, address

    a designation.

    that nowhere

    status of

    the Bankruptcy

    should allocate payments

    fails to make

    unnecessary to add
    Court

    preference provision

    of how the IRS

    taxpayer who

    designation upon

    in Begier
    ______

    to overturn the

    It

    the

    made by a
    is almost

    did the

    Supreme

    line of decisions

    allowing the IRS, absent some direction from the taxpayer, to


    apply payments to whichever
    wishes.

    of the taxpayer's liabilities it

    That line of decisions disposes of this case.

    The judgment of the district court is affirmed.


    ________

    -8-8-

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