Mulee v. United States, 85 C 7451.

• Citation: 648 F. Supp. 1181
• Decision Date: 30 October 1986
• Docket Number: No. 85 C 7451.,85 C 7451.
• Parties: Dennis L. MULEE and Albert De Carolis, Plaintiffs and Counterclaim Defendant, v. UNITED STATES of America, Defendant and Counterclaim Plaintiff, v. Robert SABEY and Robert De Muelmeister, Counterclaim Defendants.
• Court: U.S. District Court — Northern District of Illinois

648 F. Supp. 1181

Dennis L. MULEE and Albert De Carolis, Plaintiffs and Counterclaim Defendant, v. UNITED STATES of America, Defendant and Counterclaim Plaintiff, v. Robert SABEY and Robert De Muelmeister, Counterclaim Defendants.

No. 85 C 7451.

United States District Court, N.D. Illinois, E.D.

October 30, 1986.

Thomas C. Baratta, Jr., Elmwood Park, Ill., for Dennis E. Mulee, et al.

Jeff Kaplan, Dept. of Justice, c/o U.S. Atty., William F. Marutzky, Ronald S. Adelman, Marutzky & Adelman, Chicago, Ill., for U.S.

MEMORANDUM OPINION AND ORDER

ASPEN, District Judge:

In this civil tax case plaintiff Dennis Mulee ("Mulee") seeks a refund of $4,731.89 he paid against an assessment of $94,639.96 by the Internal Revenue Service ("IRS") pursuant to section 6672 of the Internal Revenue Code ("IRC") of 1954, 26 U.S.C. § 6672 (1982), as a responsible person of the Denalco Corporation ("Denalco") for the entire third quarter of 1981 and part of the fourth quarter of 1981.

On October 29, 1984, a delegate of the Secretary of the Treasury made an assessment against Mulee for a 100% penalty of $94,639.96 under the provisions of section 6672 of the Internal Revenue Code of 1984 contending that Mulee had willfully failed to collect, truthfully account for and pay over to the government withholding and Federal Insurance Contribution Act ("FICA") taxes due and owing from Denalco for the third and fourth quarters of 1981. On that date a delegate of the Secretary of the Treasury issued a notice of the assessment and demand for payment upon Mulee, and the United States credited Mulee's tax refunds and accrued interest of $4,731.89 against the assessed penalty. Subsequently, Mulee filed a claim for refund for the amounts credited contending that he was not a responsible person of Denalco for the third and fourth quarters of 1981. The IRS denied that claim on February 4, 1984, and Mulee filed this suit on August 23, 1985. The United States filed a counterclaim for the unpaid balance of the penalty.

The United States seeks dismissal of plaintiff Mulee's complaint with prejudice and a judgment on its counterclaim for the balance due on its assessment of $89,908.07 plus interest in accordance with law from October 29, 1984. Currently before this Court are the parties' cross-motions for summary judgment under Fed.R.Civ.P. 56(c). For the reasons below, we deny Mulee's motions for summary judgment as to his complaint and the government's counterclaim and grant the United States's motion for summary judgment as to its counterclaim against Mulee for $94,639.96, plus interest provided by law, and on its motion for summary judgment as to Mulee's claim for a refund.¹

UNCONTESTED FACTS

Mulee formed Denalco in 1969, and he was the president and chief executive officer from that date until November 17, 1981. During this period Mulee had check signing authority as to which creditors of the corporation were to be paid and as to the disbursal of all corporation funds.

From July 1, 1981 through September 30, 1981, the third quarter of 1981, Denalco failed to collect, account for and pay over to the United States $75,378.72 in federal income taxes and FICA taxes withheld from its employee wages. Of this amount, trust fund taxes of $57,744.00 are still due and owing to the government. From October 1, 1981 through December 31, 1981, the fourth quarter of 1981, Denalco failed to collect, account for and pay over to the government $55,116.65 in federal income taxes and FICA taxes also withheld from its employee wages. Of this amount, trust fund taxes of $55,116.65 are still due and owing. The IRS assessed a penalty against Mulee of $36,895.96 representing the trust fund taxes accruing from October 1, 1981 through the date of Mulee's resignation November 17, 1981.

From July 1, 1981 through November 17, 1981, Denalco deposited into its bank account over one million dollars and disbursed such amount to creditors other than the United States. Mulee had knowledge of the unpaid tax liability weekly and preferred other creditors over the United States by authorizing the disbursements from the company checking account instead of paying over the trust fund taxes to the United States.

On November 17, 1981, Mulee contracted with Robert Sabey and Robert DeMuelmeister to sell 100% of his stock in Denalco. The contract provided for payment of $1,150,000 to be paid to Mulee in installment payments with 10% of the stock to be delivered for each payment of 10% of the purchase price. After November 17, 1981, Mulee did not have check writing authority and did not have authority to direct payments to creditors. From this date, through and including January 31, 1983, the corporation deposited into its bank account over two million dollars and disbursed that amount to creditors other than the United States.

On July 14, 1982, the United States filed a notice of tax liens with the recorder of deeds for Kane County, Illinois, with respect to the unpaid employment tax liability of the corporation for the third and fourth quarters of 1981. Subsequently, the IRS levied one of the corporation's bank accounts. The levy was immediately released as a result of negotiations between the government and the corporation officers to pay off the unpaid tax liability. On January 28, 1983, the United States entered into an installment agreement with the corporation to pay off the past due taxes in $5,000 installments per month. Denalco subsequently defaulted under the agreement. On April 23, 1983, Denalco filed a petition in bankruptcy court for protection under Chapter 11 of the Bankruptcy Code, which was subsequently converted to a Chapter 7 liquidation. The IRS was listed as a creditor on the debtor's schedule of assets and liabilities. The IRS also filed a proof of claim, but to this date has not recovered any monies out of the Bankruptcy Estate. Both parties agree that there are no questions of material fact at issue in this case, therefore, we may decide this case as a matter of law. Fed.R. Civ.P. 56(c).

CROSS MOTIONS FOR SUMMARY JUDGMENT

The Internal Revenue Code requires an employer to deduct and withhold income and social security (FICA) taxes from its employees' wages. 26 U.S.C. § 7501 of the Code provides that the withheld taxes "shall be held to be a special fund in trust for the United States." There is no general requirement that the withheld sums be segregated from the employer's general funds or that the funds be deposited in a separate bank account until required to be paid over to the government. Slodov v. United States, 436 U.S. 238, 98 S.Ct. 1778, 56 L.Ed.2d 251 (1978). Once the taxes are withheld from the employees' wages, the United States is required to credit the amount withheld against the employees' individual income tax liabilities whether or not the employer turns the taxes over to the government. 26 U.S.C. § 31(a) (1982). Because of this the government loses revenue when the trust fund taxes are not paid over by the employer. Additionally, because the IRC requires the employer to collect taxes as wages are paid, 26 U.S.C. § 3102(a), while requiring payment of such taxes quarterly, the funds accumulated during the quarter can be a tempting source of ready cash to a failing corporation hounded by creditors. Slodov v. United States, 436 U.S. 238, 243, 98 S.Ct. 1778, 1783, 56 L.Ed.2d 251 (1978). In order to recover such lost revenues, the IRC provides for recovery in certain cases from the officers or employees of the employer responsible for the collection and payment of the trust fund taxes who willfully fail to pay over to the government the money collected. These officers or employees may be personally liable under 26 U.S.C. § 6672 to pay a penalty equal to the amount of the delinquent taxes. Section 6672 provides, inter alia:

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, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, 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....

26 U.S.C. § 6672(a) (1982).

In order for an officer or employer to be liable under section 6672, two elements must exist. First, the party must be one who is required to collect, account for and pay over the taxes. This is commonly referred to as the "responsible person" test. Next, the person must have "willfully" failed to have performed his duty to collect, account for or pay over the taxes. Kizzier v. United States, 598 F.2d 1128, 1132 (8th Cir.1979); Howard v. United States, 80-2 U.S.T.C. ¶ 9471 (D.Kan.1980).

Mulee does not contest the fact that he was a "responsible" person for the time period at issue in this case, July 1, 1981 through November 17, 1981. Therefore, the only issue as to the applicability of section 6672 is whether Mulee willfully failed to perform his duty to collect, account for or pay over the taxes.

WILLFUL FAILURE TO PAY OVER TRUST FUND TAXES

In deciding this issue it is helpful to consider each quarter separately. By the time Mulee resigned on November 17, 1981, the due date for the 1981 third quarter return had already come and gone.² On the other hand, the due date for the fourth quarter return was January 31, 1982. Mulee's argument against imposition of this penalty is primarily directed toward the fourth quarter taxes. His argument as to the third quarter taxes is that between the date he resigned and January 31, 1983, Denalco had deposited over two million dollars in its bank account and never paid the tax liability for the third and fourth quarters of 1981. Essentially, he contends that the failure of the new owners to pay the then due and owing taxes should relieve him of liability for the failure to pay. Yet, Mulee has stipulated to...