In re Pullman Const. Industries, Inc., Bankruptcy No. 87 B 06441-44. Adv. No. 92 A 00015.
| Decision Date | 30 August 1995 |
| Docket Number | Bankruptcy No. 87 B 06441-44. Adv. No. 92 A 00015. |
| Parties | In re PULLMAN CONSTRUCTION INDUSTRIES, INC., et al., Debtors. PULLMAN CONSTRUCTION INDUSTRIES, INC., Plaintiff, v. UNITED STATES of America and State of Illinois, Dept. of Revenue, Defendants. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
COPYRIGHT MATERIAL OMITTED
Stephen T. Bobo, D'Ancona & Pflaum, Chicago, IL, for plaintiff.
Joel Nathan, Office of the U.S. Trustee, Chicago, IL.
Charles J. Cannon, Trial Atty., Tax Div., U.S. Dept. of Justice, Washington, DC, for defendant U.S.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This Adversary proceeding relates to the bankruptcy proceeding filed by plaintiff under Chapter 11 of the Bankruptcy Code, Title 11 U.S.C.
Pullman Construction Industries, Inc. and various subsidiaries (collectively "Pullman" or "Debtor") filed the instant two-count Complaint to recover certain allegedly preferential tax payments made pre-petition to Defendants, the United States of America (as to payments to the Internal Revenue Service ("IRS")) ("United States") in Count I, and the State of Illinois (as to payments to the Department of Revenue) ("Illinois") in Count II. Illinois settled its dispute and Count II was dismissed. On the remaining count, Pullman and the United States agreed to submit this case for trial upon an agreed statement of facts. Such trial having been held and concluded on a stipulated record, and based upon all evidence presented and the arguments and briefing of counsel, this Court now makes and enters the following Findings of Fact and Conclusions of Law. Pursuant thereto and by separate order, judgment is entered in favor of the United States and against Pullman.
1. On May 1, 1987 ("petition date"), Pullman Construction Industries, Inc. and three wholly-owned subsidiaries, Pullman Sheet Metal Works, Inc., Preferred Piping, Inc., and Mid-City Architectural Iron Co. (collectively "Pullman" or "Debtor"), filed petitions for relief under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq. Their cases have been jointly administered. No Chapter 11 trustee was appointed and no Plan has been confirmed, but, following extensive litigation over several issues, the case has been held open to enable the Debtor to pursue remaining causes of action under the Bankruptcy Code. Pullman has administered its affairs throughout as debtor-in-possession pursuant to 11 U.S.C. §§ 1107-08.
2. Prior to its filing in bankruptcy, Pullman operated as a heating, ventilating, and air conditioning ("HVAC") contractor, selling its services primarily to commercial, industrial, and governmental entities. Pullman also designed and manufactured a patented fire damper and related products for the nuclear power industry. Pullman maintained its base of operations in Chicago, Illinois, and was incorporated under the laws of the State of Illinois. See generally In re Pullman Constr. Indus., Inc., 107 B.R. 909, 912 (Bankr.N.D.Ill.1989) (Schmetterer, J.).
3. Pullman filed the instant two-count Complaint on January 7, 1992. Count I originally sought to recover eight allegedly preferential payments, totalling in excess of $1,000,000.00, that Pullman made to the IRS to satisfy federal employment taxes. Pullman has since stipulated that the last three transfers were not preferential and now seeks to recover only the first five payments which total $610,143.64.
4. Upon completion of discovery, Pullman and the United States agreed to submit this proceeding for trial upon an agreed statement of facts. On November 18, 1994, they submitted a joint pre-trial statement which included a statement of stipulated facts and various stipulated exhibits. They subsequently filed an amended joint pre-trial statement and stipulation on December 27, 1994. Both parties thereupon rested, having stipulated to trial held on the foregoing record and factual stipulation. The parties then filed proposed findings of fact and conclusions of law to serve as their final arguments. Trial thereupon concluded, and this case is ready for decision on the record and arguments presented.
5. Prior to filing in bankruptcy, Pullman employed 595 people throughout its operations. Ex. 4, line 1a.1 As an employer, Pullman was required to deduct and withhold income and social security taxes from gross wages earned by its employees. 26 U.S.C. §§ 3102(a), 3402(a) (1995). After Pullman withheld such taxes, but before it remitted those funds to the IRS, it held such taxes in "a special fund in trust for the United States." 26 U.S.C. § 7501 (1995). Hence such taxes are commonly referred to as "trust fund taxes." See Begier v. Internal Revenue Serv., 496 U.S. 53, 55-56, 110 S.Ct. 2258, 2261, 110 L.Ed.2d 46 (1990).
6. Pullman itself was required to pay various other taxes, including social security taxes in an amount equal to its employees' withheld social security taxes, compare 26 U.S.C. § 3111 (1995) with 26 U.S.C. § 3101 (1995), corporate income taxes, 26 U.S.C. § 11 (1995), interest, and penalties. However, unlike withholding taxes, funds set aside to pay these types of obligations are not specified by statute to be held in trust for the United States ("non-trust fund taxes").
7. Although Pullman collected trust-fund taxes at the end of each salary period, it was not required to remit withheld amounts to the IRS until the end of each quarter when Pullman was required to file its "Employer's Quarterly Federal Tax Return" (Form 941). In the interim, IRS regulations required Pullman to deposit trust fund taxes with a qualified federal tax depository institution shortly after each payroll was made. Tax deposits associated with each payroll were required to be made within three banking days after the end of each one-eighth month period in which the payroll was issued, 26 C.F.R. § 31.6302-1(c) (1995), unless tax liability equaled or exceeded $100,000.00 for the period, in which case Pullman was required to deposit such taxes within one banking day after the payroll was made, 26 C.F.R. § 31.6302(c)-1 (1995).
8. Upon failure of an employer to make such deposits in a timely fashion, the IRS is authorized to assess a failure-to-deposit penalty equal to 10% of the amount not timely deposited, unless either the underdeposit was less than 5% of taxes due or the taxpayer established a reasonable cause for underdeposit. 26 C.F.R. § 301.6656-1 (1995).
9. The IRS further has statutory authority to assess a penalty against any corporate officer responsible for collecting trust fund taxes equal to 100% of the underdeposit. 26 U.S.C. §§ 6671-72 (1995). Officers are not personally liable, however, for failure to pay non-trust fund taxes. United States v. Plummer (In re Plummer), 174 B.R. 284, 285 (Bankr.C.D.Cal.1992); In re DuCharmes & Co., 852 F.2d 194, 196 (6th Cir.1988).
10. Prior to the end of 1986, Pullman regularly deposited amounts sufficient to pay its trust fund taxes in a bank qualified as a federal tax depository. Stip. 7. In December 1986, Pullman sent one payment directly to the IRS to make up for a deposit that it had missed earlier that month. Id.
11. During the first quarter of 1987 (January 1 through March 31), Pullman employees earned $5,524,839.37 in gross wages. This finding is supported by Pullman's quarterly tax return (Form 941) for that period, which reads in part: "total wages and tips subject to withholding, plus other compensation . . . $5,524,839.37." Ex. 4, line 2. Of the $5,524,839.37 in gross wages earned by its employees for the quarter, Pullman withheld $940,125.93 in federal individual income taxes. This finding is also based on Pullman's quarterly return (Form 941) for that period, which reads: "total income tax withheld from wages . . . $940,125.93." Ex. 4, line 3.
12. Pullman now argues that the amount of taxes reported by Pullman on its own return as having been withheld does not support a finding that it withheld that amount, but of course that return represents an admission to the United States as to data contained therein. Both parties stipulated to the admissibility of Pullman's quarterly return for that period in their amended joint pretrial statement. Stip. 17.
13. Pullman further reported total social security or "Federal Insurance Contribution Act" ("FICA") tax liability for the quarter equal to $787,056.97. Ex. 4, line 6. Under 26 U.S.C. §§ 3101 and 3111, Pullman was to have withheld one-half that amount, or $393,528.48, from gross wages earned by its employees and was itself liable for the remaining one-half. Although there is evidence that Pullman withheld at least a portion of the required amount, see Findings 20(b), 21(b), and 22(b), there is no evidence in the limited record presented that Pullman properly withheld the entire $393,528.48 required.
14. In late 1986 and early 1987, Pullman experienced severe cash flow shortages and operating losses that would eventually snowball into financial collapse. See generally Pullman, 107 B.R. at 912. By February 1, 1987, ninety days before filing in bankruptcy, Pullman had fallen behind in making its required deposits of trust fund taxes for the first quarter of 1987.
15. During February, March, and April 1987 (within 90 days prior to filing of the bankruptcy on May 1, 1987), Pullman sent eight checks, totalling $1,031,790.64, directly to the IRS. Stips. 8, 9. Those checks were received, collected, and applied by the IRS as follows:
DATE APPLICATION
CHECK CHECK RECEIVED OF PAYMENTS
NO. DATE AMOUNT BY IRS BY IRS
11430 2/27/87 $146,178.97 3/2/87 To Non-Trust Fund Taxes Due
11431...To continue reading
Request your trial