Cash v. U.S.

• Decision Date: 01 June 1992
• Docket Number: No. 90-1922,90-1922
• Citation: 961 F.2d 562
• Parties: -1394, 92-1 USTC P 50,298 Robert L. CASH and Evelyn L. Cash, Plaintiff-Appellants, v. UNITED STATES of America, Defendant-Counter Plaintiff-Appellee, v. Randall C. BLOCK, Counter Defendant-Appellant.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 562

961 F.2d 562

69 A.F.T.R.2d 92-1394, 92-1 USTC P 50,298

Robert L. CASH and Evelyn L. Cash, Plaintiff-Appellants, v. UNITED STATES of America, Defendant-Counter Plaintiff-Appellee, v. Randall C. BLOCK, Counter Defendant-Appellant.

No. 90-1922.

United States Court of Appeals, Fifth Circuit.

June 1, 1992.

Barnett & Cook, Clinton W. Cook and Bennett G. Cook, Lubbock, Tex., for Cash and Block.

Kenneth L. Green, Gary Allen, Chief, and Deborah Swann, Appellate Section, Tax Div., Dept. of Justice, Washington, D.C., for the U.S.

Appeals from the United States District Court for the Northern District of Texas.

Before DAVIS, JONES, and EMILIO M. GARZA, Circuit Judges.

W. EUGENE DAVIS, Circuit Judge:

Taxpayers appeal the district court's adverse judgment. They argue that the Internal Revenue Service's levy on accounts receivable of LTS Optical, Inc. (the taxpayers' corporation) satisfied the corporation's tax liability, and thereby relieved taxpayers of any liability under § 6672 of the Internal Revenue Code. The United States challenges the taxpayers' standing to raise this claim. We affirm on the merits.

I.

LTS Optical, Inc. (LTS) was formed as a Texas corporation in late 1983 with headquarters in Lubbock, Texas. The corporation operated six wholesale optical laboratories in the Southwest. Evelyn Cash, her husband Robert and Randall Block were the shareholders and officers of the corporation. (They are referred to collectively as "the taxpayers".)

The corporation fell behind in paying over to the United States the income and social security taxes that had been withheld from the wages of its employees, as well as its own share of social security taxes. For the fourth quarter of 1984, the first and fourth quarters of 1985 and the first and second quarters of 1986, LTS withheld employment taxes totalling $243,263.50, but paid over only $93,257.55. Accordingly, the Internal Revenue Service (IRS) assessed the unpaid taxes against LTS.

In July 1986, the IRS issued notices of levy against the corporation's accounts receivable which had a face value of $200,000. The IRS notified LTS's debtors to remit the amounts owed to LTS directly to the Internal Revenue Service. The IRS also seized and sold a computer belonging to LTS. As remittances on LTS's accounts receivable were received, the IRS credited the payments to LTS's tax liability. The IRS collected $73,039.40 from the levies which it applied to the tax deficiency. After these credits were applied and interest and statutory penalties added, approximately $84,000 of the corporation's withholding tax liability remained unpaid. The IRS then credited approximately $5,700 in income tax refunds due Robert and Evelyn Cash against the tax liability.

The Cashes brought this suit for refund. The Government counterclaimed for the remaining taxes due and joined Randall Block in the action. The taxpayers answered the counterclaim contending that they were not responsible persons who willfully failed to pay over the withheld taxes. In addition, the taxpayers asserted that the tax had been discharged as a result of the IRS's levy on LTS's accounts receivable and subsequent handling of the asset.

The district court granted the Government's motion in limine to exclude from trial any evidence relating to how the IRS handled the seized accounts receivable. The court concluded that this evidence did not relate to any factual issue for jury decision. It reasoned, based upon the taxpayers' proffered evidence, that the IRS's collection procedures did not as a matter of law make out taxpayers' defense that the debt was discharged.

The taxpayers' offer of proof included the depositions of the IRS case agent and Randall Block. According to the deposition of the IRS agent who handled the levy, one notice of levy was sent to the account debtors. She made no other effort to collect the receivables, although her usual practice was to follow up once with a phone call or letter. The agent had a number of discussions with Block as remittances were received from the account debtors. She also sent Block at least a partial list of which accounts had paid and the amounts collected.

Randall Block testified in his deposition that when the IRS seized the company's computer, they also seized the accounts receivable data stored in the computer and the only physical copy of the accounts receivable listing. The IRS gave him no notice that the computer or records would be seized and apparently gave him no opportunity to make a copy for himself from the computer database. The data stored in the computer's memory were erased after the seizure. After the levy, Block contacted some of his customers who owed LTS money to encourage them to pay. He met with little success.

The court presented the jury the issue of the taxpayers' responsibility and willfulness in failing to pay over the withholding taxes of LTS's employees. The jury concluded that Robert Cash and Randall Block were responsible and willful for the fourth quarter of 1984, the first and fourth quarters of 1985, and the first two quarters of 1986 (all quarters with deficiencies). The jury found Evelyn Cash responsible for all five quarters but willful only for the first two quarters of 1986.

The taxpayers filed a motion for JNOV. In their motion, the taxpayers argued that as a result of the levy on LTS's accounts receivable, LTS's withholding tax liability should be considered discharged. Once LTS's tax liability is satisfied, taxpayers contend that their liability as responsible parties is also discharged. The district court denied their motion and the taxpayers appeal.

II.

An explanation of the statutory background is helpful to understand both the merits of this appeal as well as the taxpayers' standing to appeal. The sole question presented on appeal relates to taxpayers' liability as "responsible parties" for unpaid federal withholding taxes. Sections 3102(a) and 3402(a) of the Internal Revenue Code (26 U.S.C.) require employers to withhold federal social security and income taxes from the wages of their employees. The withheld taxes constitute a special fund held in trust for the benefit of the United States under § 7501 of the Code. Newsome v. United States, 431 F.2d 742, 745 (5th Cir.1970). If an employer withholds these trust fund taxes but fails to pay them over to the United States, the employee is nevertheless credited with payment. Slodov v. United States, 436 U.S. 238, 243, 98 S.Ct. 1778, 1783, 56 L.Ed.2d 251 (1978); Newsome, 431 F.2d at 744. Thus, unless the Government has recourse against the person or persons responsible for nonpayment, the taxes will be lost. Id.

Not surprisingly, the Internal Revenue Code contains a provision allowing collection from the persons responsible for the nonpayment. Section 6672(a) of the Code provides, in part:

[A]ny 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 ... be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

Although denoted a penalty in the statute, the liability imposed by § 6672(a) is not penal in nature because it only recovers for the Government the same amount the employer was required to withhold and remit. Section 6672 simply insures that the taxes are paid. Newsome, 431 F.2d at 745, citing Botta v. Scanlon, 314 F.2d 392, 393 (2d Cir.1963). Consistent with this purpose, the IRS follows a policy of collecting the delinquent taxes only once. Therefore, if the employer corporation pays the required withholding, then any tax assessment against responsible parties will be abated to the extent of the payment.

At the same time, however, it is well established that the liability imposed upon a responsible person under § 6672 is separate and distinct from that imposed on the employer under §§ 3102 and 3402 of the Internal Revenue Code. United States v. Huckabee Auto Co., 783 F.2d 1546, 1548 (11th Cir.1986); Howard v. United States, 711 F.2d 729, 733 (5th Cir.1983); Hornsby v. I.R.S., 588 F.2d 952, 954 (5th Cir.1979). The Service need not attempt to collect first from the corporate employer or its assets before assessing penalties and pursuing collection from responsible persons under § 6672. Huckabee Auto Co., 783 F.2d at 1549; Hornsby, 588 F.2d at 954.

III.

Before considering the merits of the taxpayers' appeal, we must first address whether they have standing to complain of the IRS's failure to consider LTS's tax debt as satisfied. The Supreme Court has stated the test for standing as follows:

[T]he standing question in its Art. III aspect "is whether the plaintiff has 'alleged such a personal stake in the outcome of the controversy' as to warrant his invocation of federal court jurisdiction and to justify exercise of the court's remedial powers on his behalf." ... In sum, when a plaintiff's standing is brought into issue the relevant inquiry is whether, assuming the justiciability of the claim, the plaintiff has shown an injury to himself that is likely to be redressed by a favorable decision.

Simon v. Eastern Kentucky Welfare Rights Org., 426 U.S. 26, 38, 96 S.Ct. 1917, 1924, 48 L.Ed.2d 450, 460 (1976) (internal citations omitted, emphasis in original).

Applying this test, the first requirement is that the plaintiff-taxpayers must have suffered an injury that can be fairly traced to the challenged action of the defendant, IRS. Id. at 41-42, 96 S.Ct. at 1925-26. The IRS argues that the taxpayers have not been injured by the IRS's levy against the assets of LTS. This is true, IRS contends, because the taxpayers' liability as responsible persons under § 6672 is separate and distinct from LTS's corporate liability under §§ 3102 and 3402. The IRS clearly could have...