In re Evans, Civ. A. No. 92 N 1684. Bankruptcy No. 90 B 17558 PAC. Adv. No. 91 B 2028 SBB.
| Decision Date | 25 July 1994 |
| Docket Number | Civ. A. No. 92 N 1684. Bankruptcy No. 90 B 17558 PAC. Adv. No. 91 B 2028 SBB. |
| Citation | 173 BR 725 |
| Parties | In re John Hathaway EVANS, Jr., Debtor. John Hathaway EVANS, Jr., Appellee/Cross-Appellant, v. UNITED STATES of America, Appellant/Cross-Appellee. |
| Court | U.S. District Court — District of Colorado |
Christopher E. Bench, Aurora, CO, for John Evans, Jr.
William G. Pharo, Asst. U.S. Atty., Karen Lynne Baker, Trial Atty., Tax Div., U.S. Dept. of Justice, Washington, DC, for U.S.
This is an appeal from an order and judgment entered by the United States Bankruptcy Court for the District of Colorado. The parties dispute the bankruptcy court's calculation of the amount of penalty which was assessed pursuant to I.R.C. § 6672 (West Supp.1993), and have filed cross-appeals. Jurisdiction is based on 28 U.S.C.A. § 158(a) (West 1993).
Debtor-Appellee John Hathaway Evans, Jr. ("Evans") was president of a corporation called Passage Home Communications ("Passage Home"). Prior to May 1989, Passage Home neglected to file its tax returns or make any payment on its federal withholding taxes, pursuant to the Federal Insurance Contributions Act, I.R.C. §§ 3101-3128 (West 1989) hereinafter "FICA taxes", and its income taxes, pursuant to I.R.C. §§ 3401-3406 (West 1989) hereinafter "form 941 taxes", for the second, third, and fourth quarters of 1988 and the first quarter of 1989. Passage Home's form 941 tax returns revealed the following tax liabilities:
Period Total Tax Non-Trust Fund Trust Fund
2nd Quarter 1988 $6,964.97 $ 2,201.49 $ 3,763.48
3rd Quarter 1988 $28,388.76 $ 8,675.87 $19,712.89
4th Quarter 1988 $34,272.29 $10,111.16 $24,161.13
1st Quarter 1989 $44,901.31 $13,456.02 $31,445.29
Total: $114,527.33 $34,444.54 $80,082.79
(Appellant's Br. at 7 Joint Stipulation of Facts ¶ 2.)1
On May 18, 1989, Evans met with Sharon Rye, a revenue officer for the Internal Revenue Service ("IRS"). Rye demanded full payment of the taxes owed. (Appellant's Br. at 7 Pl.'s Ex.L ¶¶ 2 & 6; Memorandum Opinion and Order, Relevant Facts ¶ 4 filed July 17, 1992 hereinafter "Order".) Evans gave Rye a check for $15,000 drawn on Passage Home's account. (Appellant's Br. at 7 Joint Stipulation of Facts ¶ 4.) Rye directed that the check be applied to the non-trust fund portion of the form 941 tax liabilities for the second quarter ($2,201.01)2 and third quarter ($12,798.99) of 1988. (Joint Stipulation of Facts ¶¶ 4-5.) This check completely paid the principal amount of the non-trust fund taxes for these quarters; therefore, the remainder of the check was applied to penalties and interest on the form 941 taxes. (Appellant's Br. at 8 Def.'s Ex. 11 ¶ 23.)
On May 25, 1989, the IRS received a check for $25,000 drawn on Passage Home's account. Rye directed that $23,093.88 be applied to the non-trust fund taxes, and that $1,906.12 be applied to the corporation's Federal Unemployment Tax Act, I.R.C. §§ 3301-3311 (West 1989), taxes hereinafter "form 940 taxes" for 1988, penalties, and interest. (Joint Stipulation of Facts ¶¶ 6-7; Order ¶ 5.)
On June 22, 1989, the IRS received a check for $25,000 drawn on Passage Home's account. Rye directed that the funds be applied to the non-trust fund taxes. (Joint Stipulation of Facts ¶ 9.) Again, because this check completely paid the principal amount of the non-trust fund taxes, the remainder was applied to the associated interest and penalties on the form 941 taxes. (Appellant's Br. at 9 Def.'s Ex. 11 ¶¶ 19, 25, 31 & 37.)
On July 25, 1989, the IRS received a check for $10,000 drawn on Passage Home's account. Rye directed that the funds be applied to the non-trust fund taxes, associated penalties, and interest. (Joint Stipulation of Facts ¶¶ 10-11.) Since the principal amount of the non-trust fund taxes had been completely paid, the entire amount was applied to penalties and interest on the form 941 taxes. On July 26, 1989, the IRS assessed the form 941 taxes along with all related penalties and interest. (Joint Stipulation of Facts ¶ 15.)
On August 30, 1989, the IRS received a check for $5,000 drawn on Passage Home's account. Rye directed that $1,354.11 be paid to interest, $1,092.27 be paid to penalties, and $2,553.44 be applied to the trust fund portion of Passage Home's tax liability. (Br. of Appellee/Cross Appellant, John Hathaway Evans, Jr., Statement of the Facts ¶ 2 Def.'s Ex. 11 ¶ 41 filed Nov. 23, 1992 hereinafter "Appellee's Br."; contra Joint Stipulation of Facts ¶¶ 12-13; Order, Relevant Facts ¶ 10.)
On November 17, 1989, Passage Home filed a voluntary petition for bankruptcy pursuant to chapter 11 of the Bankruptcy Code, 11 U.S.C.A. §§ 1101-1174 (West 1993). (Order, Relevant Facts ¶ 11.) On March 12, 1990, the IRS made an assessment of liability pursuant to I.R.C. § 6672 (West Supp.1993), for the willful failure of the debtor to collect, truthfully account for, and pay over the federal withholding taxes of Passage Home for the four quarters in question.3 The assessment was in the amount of $80,082.76. (Joint Stipulation of Facts ¶ 16.)
On November 14, 1990, Evans filed a petition for bankruptcy under chapter 7 of the Bankruptcy Code, 11 U.S.C.A. §§ 701-766 (West 1993). On January 16, 1991, the IRS filed its "Proof of Claim" in the Passage Home bankruptcy proceeding. (Appellee's Br., Statement of the Facts ¶ 3 Pl.'s Ex. E.) In this document, the IRS credited the entire amount of payments, approximately $80,000, to tax obligations, rather than to penalties and interest. The IRS claimed that only $36,449.45 in form 941 taxes remained due. Nevertheless, Evans was assessed $80,082.79 in section 6672 penalties. (Appellee's Br., Statement of the Facts ¶ 3 Pl.'s Ex. E; Def.'s Ex. 11 ¶ 9.) On February 13, 1991, Evans received his discharge. (Appellant's Br. at 11.) On December 19, 1991, Evans filed an adversary "Complaint to Determine Dischargeability of Debt, Objecting to Claim and for Injunctive Relief" against the government in order to determine the amount of the section 6672 penalty. (Id. at 6.) As of January 8, 1992, the IRS had seized or received voluntary payments in the amount of $16,512.45 for the section 6672 penalties. (Order, Relevant Facts ¶ 14.)
On June 3, 1992, the bankruptcy court held a trial on Evans' adversary complaint. On July 17, 1992, the bankruptcy court issued its Order. (Appellant's Br. at 11.) The bankruptcy court held that Passage Home's liability for penalties and interest on the form 941 taxes was payable only after the IRS had given proper notice and demand. (Id. at 11-12.) Since notice and demand had not occurred until July 26, 1989, the IRS had inappropriately applied payments made prior to this date to penalties and interest which had accrued but had not yet been assessed. Thus, of the approximately $75,000 paid before July 26, only $34,444.52 (the principal amount of the non-trust fund portion of the form 941 taxes) could be applied to non-trust fund liabilities; the remainder ($40,555.48) should have been applied to the trust fund principal, leaving a balance due for penalties and interest on the non-trust fund taxes of $39,527.31. Since the August 30, 1989, payment of $5,000 was made after assessment, the bankruptcy court found that the full amount should have been applied to the $39,527.31. (Id. at 12.)
On August 5, 1992, Evans filed a motion to amend judgment in order to include a payment of $3,080 which had been paid by another taxpayer, but had been excluded by the bankruptcy court. On August 12, 1992, amended judgment was entered, leaving the IRS with a total claim of $23,014.86, plus interest from March 12, 1990, to January 28, 1992, to be calculated in accordance with applicable IRS procedures. (Id. at 13.)
Each of the parties appeals the bankruptcy court's decision. The questions raised on appeal are as follows: (1) whether the bankruptcy court erred when it concluded that the IRS could not apply payments to accrued but unassessed interest and penalties; (2) whether the bankruptcy court erred when it reduced the section 6672 penalty by the total amount of payment without allowing for interest which accrued between payments; and (3) whether the bankruptcy court erred when it concluded that the IRS could re-allocate to payment of penalties and interest a voluntary payment that the IRS had applied, for purposes of its "Proof of Claim" in the related corporate bankruptcy, toward payment of tax liabilities. I conclude as follows: (1) the bankruptcy court erred when it did not permit the IRS to apply Evans' payments to both the principal tax and the interest on this tax; (2) the bankruptcy court erred when it reduced the section 6672 penalty by the total amount of payment without allowing for interest which accrued between payments; and (3) the bankruptcy court properly permitted the IRS to re-allocate the payment made after assessment to penalties and interest on the non-trust fund taxes.
Legal determinations by the bankruptcy court are reviewed de novo. In re Branding Iron Motel, Inc., 798 F.2d 396, 399-400 (10th Cir.1986). In contrast, factual determinations are reviewed under a clearly erroneous standard. Fed.R.Bankr.P. 8013; Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 573-75, 105 S.Ct. 1504, 1511-12, 84 L.Ed.2d 518 (1985); In re Mullet, 817 F.2d 677, 678 (10th Cir.1987). Since the issues raised by the parties concern legal determinations only, I review them de novo.
The Internal Revenue Code hereinafter "the Code" requires employers to withhold from their employees' paychecks money representing employees' personal income taxes and social security taxes....
To continue reading
Request your trial