Lostocco v. D'ERAMO, A99A0253.

• Citation: 518 S.E.2d 690,238 Ga. App. 269
• Decision Date: 26 May 1999
• Docket Number: No. A99A0253.,A99A0253.
• Parties: LOSTOCCO v. D'ERAMO.
• Court: United States Court of Appeals (Georgia)

518 S.E.2d 690

238 Ga. App. 269

LOSTOCCO v. D'ERAMO.

No. A99A0253.

Court of Appeals of Georgia.

May 26, 1999.

Raiford, Dixon & Thackston, Tyler C. Dixon, Atlanta, for appellant.

Weiner, Yancey, Dempsey & Diggs, Beryl H. Weiner, Thomas C. Dempsey, Atlanta, for appellee.

ELDRIDGE, Judge.

Alexander Lostocco, plaintiff-appellant, and Anthony P. D'Eramo, defendant-appellee, formed as stockholders and investors a corporation, Performance Leasing, Inc. ("PLI"), and plaintiff operated it in Atlanta. Such day-to-day operations by the plaintiff included all accounting. Defendant lived in Cincinnati and had no involvement with the management or day-to-day operations of PLI. Defendant believed that the plaintiff was utilizing PLI for his individual interests rather than the company's interests. Therefore, early in 1987, defendant took over PLI to liquidate it. Defendant shipped PLI's books and records to Cincinnati. On May 31, 1988, plaintiff filed suit against the defendant for taking over the company.

On May 31, 1988, to settle the suit the parties entered into a written settlement agreement in which plaintiff transferred all of his stock in PLI to defendant. The defendant, in consideration, agreed to indemnify plaintiff from federal taxes arising from PLI. Under the agreement, defendant "shall pay and hereby agrees to indemnify [plaintiff], and each of them, from and against any liability for federal taxes arising out of PLI and its operations. There is no agreement between the parties with respect to any state withholding taxes, and the parties' respective rights or liabilities concerning any state withholding taxes shall be unaffected by this settlement agreement or the releases or covenants contained herein."

Beginning in 1987, the IRS began an audit of PLI, focusing on the trust fund taxes. Plaintiff alleged that neither PLI nor defendant paid federal employees' withholding trust fund taxes totalling $18,917.53 for federal income, FICA, and Medicare for the quarters ending December 31, 1986 and March 31, 1987. In October 1987, PLI filed its withholding tax return for the first quarter of 1987 without paying the taxes due. In June of 1991, the IRS gave notice of its intent to levy such taxes against the corporate officers, plaintiff and defendant, for failure to pay such trust fund taxes. As of February 23, 1991, the interest and taxes were $22,721.71 To stop the running of interest, plaintiff paid the IRS $22,790.28.

The IRS levied upon plaintiff's bank account to collect the trust fund taxes due. Plaintiff demanded indemnification under the agreement for the taxes paid, but defendant refused to indemnify what he contended were federal penalties.

In September 1991, plaintiff sued defendant for breach of contract. Defendant answered and raised several affirmative defenses. Plaintiff moved for summary judgment. Defendant responded and filed his own cross motion for summary judgment. Defendant moved to strike the affidavits of plaintiff's witnesses. Plaintiff moved to strike defendant's affidavits.

After oral argument, the trial court granted defendant's motion for summary judgment and denied plaintiff's motion for summary judgment. Plaintiff appealed.

Plaintiff's first and second enumerations of error are that the trial court erred in denying plaintiff's motion for summary judgment and in granting defendant's motion for summary judgment. We agree.

The plain and unambiguous language of the agreement obligates defendant to pay PLI's federal taxes and to indemnify plaintiff for any federal taxes that he had to pay on behalf of PLI. See Hartley-Selvey v. Hartley, 261 Ga. 700, 410 S.E.2d 118 (1991); Care-America v. Southern Care Corp., 229 Ga. App. 878, 494 S.E.2d 720 (1997). However, the phrase "federal taxes" is ambiguous, because it may include corporate income tax, fiduciary fund taxes, interest, and penalties. The parties do not agree that 26 USC § 6672 penalties come within this provision, but agree that PLI was under a duty to payover the employees' withholding taxes under 26 USC § 7501. The trial court refused to resolve such issue of construction and instead resolved the dispute under federal public policy that rendered the indemnity agreement void.

(a) The Internal Revenue Code § 7501, 26 USC § 6672, imposes the obligation upon the employer to collect, report, and pay over such trust account taxes. Failure to do so makes the employer and officers liable for such sums as "responsible persons." See 26 USC § 6672. Under 26 USC § 6672, while the IRS can collect trust account taxes from the responsible person, it cannot collect late penalties and interest levied against the employer for non-payment. See First Nat. Bank in Palm Beach v. United States, 591 F.2d 1143, 1149 (5th Cir.1979).

Under 26 USC § 7501(a), an employer is required to withhold taxes from employees in a "special fund in trust for the United States." Under 26 USC § 6672(a), the IRS may impose "a penalty equal to the total amount of the tax evaded[.]" The IRS can make such assessment of 100 percent of the payroll withholding liability against all people liable for such taxes. But 26 USC § 6672 policy limits the IRS to only one satisfaction of the payroll tax liability. Gens v. United States, 615 F.2d 1335, 1339, 222 Ct.Cl. 407 (1980). Such penalty is to be levied against "(1) a responsible person, who has (2) willfully failed to perform a duty to collect, account, or pay over the taxes. [Cit.]" George v. United States, 819 F.2d 1008, 1011 (11th Cir.1987). The levy under 26 USC § 6672 against the responsible person, who has committed a "flagrant violation of the law," is based on a willful breach of trust imposed by statute. Smith v. United States, 894 F.2d 1549, 1553 (11th Cir.1990).

The Code and the regulations thereunder require employers to withhold from employees' paychecks the employees' share of FICA taxes and income taxes. See Slodov v. United States, 436 U.S. 238, 242-43, 98 S.Ct. 1778, 1782-83, 56 L.Ed.2d 251 (1978). See also 26 CFR §§ 31.6011(a)-1, 31.6011(a)-4. Once the employer deducts funds from the employees' checks, the Government credits the employees for the funds withheld. Regardless of whether or not the employer pays the withheld taxes over to the Government, the Government's only recourse is against the employer. Slodov [v. United States, supra at 1783]. Withheld funds constitute a trust in favor of the United States from the time that the employer deducts them from employees' checks, and the employer is liable to the Government for any amounts withheld. Id.; Code § 7501(a).

Smith v. United States, supra at 1552-1553. "[T]he purpose of section 6672 ... is to give the Government a second person to turn to in the event that withholding taxes prove uncollectible from the employer. [Cits.]" Id. at 1555.

(b) Under 26 USC § 6672, the sum imposed upon the officers for failure to pay the employees' trust fund taxes is designated a penalty. Notwithstanding such designation, it is a sum equal to the trust fund taxes of the employees that the officers failed to turn over to the IRS. See United States v. Sotelo, 436 U.S. 268, 275, 98 S.Ct. 1795, 56 L.Ed.2d 275 (1978); see also Smith v. United States, supra at 1553; Botta v. Scanlon, 314 F.2d 392 (2nd Cir.1963). However, 26 USC § 6671(a) expressly provides that "any reference in this title to `tax' imposed by this title shall be deemed also to refer to the penalties and liabilities provided by this subchapter (including [26 USC] § 6672)." (Citation omitted.) Botta v. Scanlon, supra at 393.

The funds here involved[, employee withholding taxes,] were unquestionably "taxes" at the time they were "collected or withheld from others." ... That the funds due are referred to as a "penalty" when the [IRS] later seeks to recover them does not alter their essential character as taxes... at least in a case in which, as here, the § 6672 liability is predicated on a failure to pay over, rather than a failure initially to collect, the taxes.

United States v. Sotelo, supra at 275, 98 S.Ct. 1795. Thus, the penalty is a mere collection device to recover the unpaid taxes and does not impose an additional penalty beyond the taxes owed. See Newsome v. United States, 431 F.2d 742, 745 (5th Cir.1970); United States v. Molitor, 337 F.2d 917 (9th Cir.1964). "The nature of the penalty imposed ... shows that § 6672 is simply a means for ensuring that the tax is paid, and does not impose a criminal liability." Botta v. Scanlon, supra at 393. The IRS treats payment of the trust account sums under 26 USC § 6672 as a tax. See Kelly v. Lethert, 362 F.2d 629, 633 (8th Cir.1966); Botta v. Scanlon, supra at 393. Consequently, the IRS can collect such trust account sums only once, no matter who ultimately pays it. United States v. Huckabee Auto Co., 783 F.2d 1546 (11th Cir.1986); Newsome v. United States, supra at 742; Gens v. United States, supra at 1339; Brown v. United States, 591 F.2d 1136, 1142-1143 (5th Cir. 1979); Kelly v. Lethert, supra at 635. The IRS cannot collect 26 USC § 6672 sums greater than the amount due as a delinquent tax. United States v. Sotelo, supra at 279, n. 12, 98 S.Ct. 1795; see also United States v. Security Pacific Business Credit, 956 F.2d 703, 705, 707 (7th Cir.1992).

(c) In pre-1996 tax refund cases, several federal district courts refused to recognize contribution or indemnification theories under 26 USC § 6672 as a federal claim; this occurs when the IRS either brings in a third-party defendant or additional defendant in counterclaim on a refund case. In Rebelle v. United States, 588 F.Supp. 49, 51 (M.D.La. 1984), relied upon by the defendant, the trial court wrote, "[t]he question for this Court, then, is whether a statutory right to contribution under section 6672 has been sanctioned by Congress." In 1984, the answer was no, but the federal trial court went on to reject a state contract indemnity claim for the same reasoning, although it had...