Opinion
CASE NO. 90-03920-8-JRL
March 7, 2000
ORDER
This matter comes before the court on the debtors' objection to claims. A hearing was held on February 15, 2000 in Wilmington, North Carolina. For the reasons that follow, the objection is overruled and the funds held by the chapter 7 trustee shall be turned over to the Internal Revenue Service ("IRS").
Facts
Debtors filed a chapter 11 petition on November 21, 1990 and then converted to chapter 7 pursuant to this court's order entered on July 18, 1991. Discharge was entered on November 15, 1991, and the final decree was entered on March 28, 1995. The IRS originally filed a proof of claim on March 8, 1991, in the amount of $134,580.01, which included unsecured priority claims of $34,517.07 and $86,010.63 for 100% tax penalties assessed for the tax periods ending on December 31, 1989 and September 30, 1990 respectively. On June 28, 1991 the IRS filed an amended proof of claim for the increased amount of $172,798.39, due to the inclusion of a $38,546.73 100% tax penalty for the tax period ending December 31, 1990. These accumulated claims arose from failures of the debtors, supposedly as responsible persons, to pay employee trust fund payroll taxes on behalf of two corporations they owned, Carolina Frozen Foods, Inc. and Sanderson Farms, Inc. This resulted in joint and several penalty assessments under 26 U.S.C. § 6672.
The proof of claim filed by the L.RS. does not indicate the actual date of assessment for the 100% tax penalties.
Fundamentally, "[a] responsible person is a person required to collect, truthfully account for or pay over any tax." Quattrone Accountants, Inc. v. Internal Revenue Service, 895 F.2d 921, 927 (3d Cir. 1990), citing Slodov v. United States. 436 U.S. 238 (1978). A person, in this context under the Internal Revenue Code, includes "an officer or employee of a corporation . . . who as such officer, employee . . . is under a duty to perform the act in respect of which the violation occurs." 26 U.S.C. § 6671(b).
In an order filed on February 24, 1994, this court allowed the trustee's objection to the IRS's first unsecured priority tax claim, number nineteen (19), as supplanted by claim twenty-six (26) filed on June 28, 1991 in the amount of $171,126.74. According to the chapter 7 trustee's final account and request for final decree filed on March 14, 1995, $111,877.22 was paid to the IRS as a priority tax payment under 11 U.S.C. § 507(a)(8), via the trustee's checking account, on January 26, 1995. The debtors did not tile an objection to this claim.
As previously recognized, the debtors' expended much time and effort in obtaining an abatement of the § 6672 tax liability as to Mr. Sanderson, subsequent to entry of the final decree in this bankruptcy case. Upon receiving the debtors' letter of April 22, 1999, apprising the court of a forthcoming IRS refund, their case was reopened and the chapter 7 trustee was reinstated. On June 9, 1999 the IRS refunded $48,791.70 to the chapter 7 trustee, which represented the amount of the original tax fund penalty payment of $34,517.07 plus interest. This court ordered that creditors be allowed to file proofs of claim so as to determine the remaining outstanding claims. In response, the IRS filed another amended proof of claim in the amount of $64,643.23 for the remaining unsecured priority taxes owing. The supporting documentation to the claim lists two civil penalties in the amounts of $28,928.71 and $35,714.52, assessed on February 24, 1992 and April 10, 1991 respectively for the tax periods ending September 30, 1990 and December 31, 1990. These are the amounts that Ms. Sanderson is still liable for according to the IRS.
Analysis
The joint and several liability of the 100% tax penalties assessed under 26 U.S.C. § 6672 is dispositive of the debtors' objection to the proof of claim filed by the IRS. As long as employee trust fund taxes are still owed by one of the debtors the IRS has a valid claim against the refunded property of the estate based on its unsecured priority tax claim under 11 U.S.C. § 507(a)(8). Abatement of the tax penalty as to Mr. Sanderson has no effect upon Ms. Sanderson's liability as she remains a "responsible person" under the Internal Revenue Code. Thus, regardless of the peculiar circumstances by which the IRS actually refunded property of the bankruptcy estate, Ms. Sanderson still owes the IRS for unpaid employee trust fund taxes, assessed as a penalty under § 6672. Thus her objection is without legal merit.
In this court's order entered on October 27, 1999 it was determined that the money refunded to the chapter 7 trustee by the IRS is property of the estate.
The IRS asserts, and the testimony and evidence at the hearing corroborated, that Ms. Sanderson filed the tax forms, 940 and 943, for Carolina Frozen Foods, Inc. and Sanderson Farms, Inc., and was a "responsible person" for purposes of § 6672.
At the hearing, counsel for the IRS explained that the tax had been abated as to Mr. Sanderson because it was determined that he was not a "responsible person" in regard to the trust fund taxes. Ms. Sanderson, though, is a "responsible person." Further, in most cases those people who are jointly liable for employee trust fund taxes are not typically married. Thus it is standard practice to refund these types of penalties, when appropriate, instead of retaining the money and applying it against the spouse's liability.
The initial assessment of the § 6672 penalties violated the automatic stay in that it was made after the debtors' filed their petition and the IRS did not first move for relief from the automatic stay to assert the claim against the bankruptcy estate. Such a failure, though, did not eliminate this tax liability, owed by Ms. Sanderson, which is excepted from discharge under 11 U.S.C. § 523(a)(1)(A) as a tax specified in § 507(a)(8). Therefore, the IRS appropriately withdrew its initial assessment and effectively reassessed the penalty after the debtors' received their discharge, at which point the automatic stay had dissolved. Simply put, Ms. Sanderson still owes the IRS because liability under § 6672 is joint and several.
According to the testimony of Michael Knott, the IRS agent at the hearing, the initial assessment of the 100% tax penalties occurred on April 10, 1991, were thereafter abated when the IRS realized this was a stay violation, and then reassessed on February 24, 1992 post discharge.
Understanding the nature and mechanics of this tax liability is helpful in resolving the debtors' objection to claim. The Internal Revenue Code requires employers to withhold social security and federal income taxes from the wages of its employees. See 26 U.S.C. § 3102 and 3402 (1999). Further, under § 3403, the employer "shall be liable for the payment of the tax required to be deducted and withheld" from the employee payroll. 26 U.S.C. § 3403 (1999). These monies are deemed "a special fund held in trust for the United States from the time they are required to be collected until the time they are paid to the government." United States v. Twomey, In re Twomey, 24 B.R. 799, 802 (Bankr. W.D.N.Y. 1982),citing 26 U.S.C. § 7501. Such employee withholdings are colloquially called trust fund or trust fund payroll taxes.
Regardless of whether or not the employer pays the trust fund taxes to the government, the employees are credited as if the payment was actually made. See In re Twomey, 24 BR. at 802. If the employer in fact does not pay, then the government is out of pocket. As a mechanism to recover unpaid trust fund taxes Congress enacted 26 U.S.C. § 6672, which allows the United States to "proceed directly against the persons responsible for collecting and paying the withholding taxes who have willfully failed to pay the tax." Id. An assessment under this section is termed a 100% penalty, but that nomenclature is misleading because the liability is actually for 100% of the amount of unpaid taxes, not an additional penalty.
The United States Supreme Court observed that "[b]ecause the Code requires the employer to collect taxes as wages are paid, § 3102(a), while requiring payment of such taxes only quarterly, the funds accumulated during the quarter can be a tempting source of ready cash to a failing corporation beleaguered by creditors." Slodov v. United States 436 U.S. 238, 243 (1978).
As explained in a treatise on IRS procedure, "[t]he term penalty is somewhat misleading. The amount of the liability imposed by Section 6672 is equal to the amount of the delinquent trust fund taxes and is not in addition to those taxes. Consequently, the 'penalty' is actually a collection device designed for the purpose of collecting the taxes the employer should have paid over." M. Saltzman, IRS Practice and Procedure (1981) Para. 17.07 at 17-31, cited in Anglemyer v. United States, 115 Bk 510, 511 n. 3 (Bankr. D. Md. 1990).
Liability assessed pursuant to § 6672 is joint and several as "each responsible person can be held for the total amount of withholding not paid." Sinder v. United States, 655 F.2d 729, 732 (6th Cir. 1981). Hence, there can be one or more people responsible for the same employer's failure to pay trust fund taxes. Accordingly, if one person's, in this case Mr. Sanderson' 5, liability is abated under this section, the other responsible persons are liable for that amount. For example, if Mr. and Ms. Sanderson were assessed and Mr. Sanderson paid the full assessment, a subsequent abatement of the penalty as to Mr. Sanderson simply means that Ms. Sanderson will then be liable for the full amount. The underlying debt for the unpaid trust fund taxes does not change until it is satisfied by whichever party, the employer or any "responsible person" employee.
Abatement of the penalty as to Mr. Sanderson has no effect on the fact that the 100% penalties are still due; it simply changes the pool of named responsible persons to include only Ms. Sanderson. Hence, the money refunded to the bankruptcy trustee, excluding the amount previously granted to Ms. Sanderson as an administrative claim, must be returned to the IRS to be applied to Ms. Sanderson's outstanding tax liability under § 6672. Her objection to the IRS's claim is hereby overruled.
The debtors had also objected to the claim of Cape Fear Farm Credit ("Cape Fear") in their motion, but the estate funds will be exhausted by paying the IRS claim. That objection is rendered moot.