Westerman v. United States

• Decision Date: 27 June 2013
• Docket Number: No. 12–1943.,12–1943.
• Citation: 718 F.3d 743
• Parties: Gary WESTERMAN, also known as G. Westerman, Plaintiff–Appellant v. UNITED STATES of America, Defendant–Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

718 F.3d 743

Gary WESTERMAN, also known as G. Westerman, Plaintiff–Appellant

v.UNITED STATES of America, Defendant–Appellee.

No. 12–1943.

United States Court of Appeals, Eighth Circuit.

Submitted: Jan. 15, 2013.

Filed: June 27, 2013.

Neil Deininger, argued, Nicolas Corry, on the brief, Little Rock, AR, for Appellant.

Curtis Clarence Pett, argued, Patricia M. Bowman, Bruce R. Ellison, on the brief, Washington, DC, for Appellee.

Before RILEY, Chief Judge, WOLLMAN and GRUENDER, Circuit Judges.

RILEY, Chief Judge.

Gary Westerman, as president and owner of WestCorp, Inc., presided over the financial collapse of S & S Office World (S & S), WestCorp's office supply store in Hot Springs, Arkansas. S & S could not compete when Office Depot moved into town. As WestCorp's losses mounted in 2000 and 2001, the company continued to pay employees and creditors, but underpaid the Internal Revenue Service (IRS). Unable to recover from the now defunct WestCorp, the IRS assessed a penalty under 26 U.S.C. (I.R.C.) § 6672 against Westerman, the person responsible for collecting and paying the “trust fund” portion (i.e., the amount withheld from employees' paychecks) of WestCorp's federal employment taxes.

Although Westerman has paid the full $35,824.45 penalty, he accepts responsibility only for $28,955.15 of the unpaid taxes. He pursued an administrative claim, which the IRS denied, and then sued the government for a refund in district court. His dispute with the IRS centers on its treatment of admittedly incomplete payments WestCorp made from 2000 to 2001. To maximize its recovery, the IRS applied those payments first toward WestCorp's non-trust fund (i.e., employer matching contribution) taxes rather than dividing the payments proportionally between WestCorp's trust fund and non-trust fund taxes. Westerman argued (1) he did not willfully fail to ensure WestCorp paid the trust fund taxes, and (2) the IRS should have applied the 2000 and 2001 underpayments proportionally to the trust fund and non-trust fund taxes. The district court ¹ disagreed and granted summary judgment in favor of the government. Westerman appeals, and we affirm.

I. BACKGROUNDA. Facts

Until S & S ceased operations in 2002, Westerman was responsible for withholding and paying federal employment taxes for S & S. In the first quarter of 2000, Westerman discovered that WestCorp had run out of cash to pay the IRS, and Westerman skipped his March 2000 tax payment. WestCorp's financial problems continued throughout 2000 and 2001, and the company fell behind in its payments to suppliers and creditors. Although WestCorp continued to pay employees, suppliers, and creditors—sometimes late—the company never caught up on its IRS payments. WestCorp did not fully pay its employment taxes in the first and fourth quarters of 2000 or the first, third, and fourth quarters of 2001. During those quarters, WestCorp made only the following five payments:

1. $5,508.14 on February 24, 2000. WestCorp's Form 941 for the first quarter of 2000 listed a monthly tax liability of $5,508.14 for January 2000.

2. $4,704.94 on April 3, 2000. WestCorp's Form 941 for the first quarter of 2000 listed a monthly tax liability of $4,704.94 for February 2000.

3. $5,166.88 on December 11, 2000, which Westerman says was intended to satisfy WestCorp's November 2000 tax liabilities. WestCorp's Form 941 for the fourth quarter of 2000 listed tax liabilities of $5,166.88 for October 2000, and either $4,839.68 or $4,872.29 for November 2000.²

4. $5,811.66 on April 19, 2001. WestCorp's Form 941 for the first quarter of 2001 listed a tax liability of $5,811.66 for March 2001.

5. $1,165.95 on December 27, 2001, which approximately equaled WestCorp's total employment tax liability for the month of November 2001. The record does not contain a Form 941 for the fourth quarter of 2001. Westerman avers that a copy of this form is not available from the IRS and neither he nor WestCorp has a copy of that quarter's Form 941. Westerman admits all of WestCorp's records were destroyed approximately a year and a half before he brought this case. The government agrees WestCorp's tax liability for November 2001 was $1,165.92. ³

Westerman avers that he and WestCorp intended each of those payments to cover the full employment tax liability—both trust fund and non-trust fund—for particular months within the corresponding quarters.

But when Westerman made these five payments on WestCorp's behalf, he did not specifically instruct the IRS—whether by writing on the check, the payment coupon accompanying the check, or in a contemporaneous letter—to apply the payments in any particular manner. In accordance with its longstanding practice, the IRS applied those payments first toward Westerman's non-trust fund tax obligations for the quarter in which the payments were made. By doing so, the IRS increased its potential tax recovery, because WestCorp's trust fund taxes—unlike its non-trust fund taxes—were recoverable from Westerman personally if he willfully failed to ensure their payment. SeeI.R.C. § 6672.⁴ Westerman admits that after learning the IRS applied WestCorp's payments to the non-trust fund liability—meaning WestCorp's proportional trust fund liabilities for the months at issue were not paid—“he authorized payment of obligations of WestCorp, Inc., other than the subject federal employment tax obligations for the quarters at issue.”

On March 25, 2004, the IRS assessed a personal penalty of $35,824.45 against Westerman under I.R.C. § 6672. Having allocated WestCorp's payments first to the non-trust fund portion—for which Westerman was not personally liable—the IRS held Westerman personally liable under I.R.C. § 6672 for the unpaid trust fund portion of WestCorp's tax liabilities. Westerman paid the assessment in full.

B. Procedural History

On January 25, 2008, Westerman filed a timely administrative claim for refund, asserting for the first time that the IRS should have applied the five payments to WestCorp's liability for particular months rather than quarters. On August 13, 2008, the IRS denied Westerman's refund claim. On March 2, 2009, after Westerman administratively appealed, the IRS Appeals Office sustained the denial of his claim for refund.

On July 19, 2010, Westerman filed a complaint under I.R.C. § 7422 in the Western District of Arkansas, seeking a refund of $7,122.31 (i.e., $2,115.27 for Q1 2000, $3,115.44 for Q4 2000, $852.39 for Q1 2001, and $1,039.21 for Q4 2001). Westerman later reduced his refund request to $6,869.30. Westerman asserted (1) he did not willfully fail to pay WestCorp's trust fund liabilities for the five months WestCorp made payments, and (2) WestCorp's five payments were effectively, though not expressly, designated to pay the employment taxes for the months to which their amounts corresponded. The government moved for summary judgment, which the district court granted. The district court found “Westerman acted willfully when he made payments to creditors without first fulfilling his liability for payroll taxes due and owing to the United States.” The district court also found Westerman had “failed to designate” the payments, and “[i]n the absence of a specific designation, the IRS is entitled to apply deposits and payments as it determines them to be in the best interest of the IRS, in order to collect the taxes that will be hardest to recover, even if it results in an increased tax liability.” Westerman moved for reconsideration, which the district court denied. Westerman appeals.⁵

II. DISCUSSION

Although a tax case, this appeal arises from a district court's grant of summary judgment. We review the district court's order under the familiar de novo standard of review applicable to summary judgment in any non-tax case. See, e.g., Colosimo v. United States, 630 F.3d 749, 752 (8th Cir.2011). Our de novo review leads us to agree with the district court's analysis. First, as a matter of law, the undisputed facts establish that Westerman willfully failed to pay the ratable trust fund portion of WestCorp's five payments because he admittedly paid private creditors rather than the IRS after learning that the trust fund taxes at issue in this case were unpaid. Second, the undisputed facts establish that Westerman failed to designate in writing how the IRS should apply the five payments at issue in this case, and the IRS was well within its statutory and common-law rights to apply the payments in the treasury's best interest.

A. Willfulness Under I.R.C. § 6672

Although the government's hesitation at oral argument gave us pause, we agree with the district court that the undisputed facts show, as a matter of law, Westerman willfully failed to pay the trust fund taxes at issue in this appeal.

1. Willfulness Standard

Congress requires employers to withhold from their employees' paychecks three federal taxes: income, Social Security, and Medicare. SeeI.R.C. §§ 3101, 3102(a), 3402(a)(1), 3403. The money thus withheld becomes the “trust fund” portion of federal employment taxes because the employer holds the money in “trust” for the federal government until paying it to the IRS. I.R.C. § 7501; see, e.g., Anuforo v. Comm'r, 614 F.3d 799, 802 n. 2 (8th Cir.2010). By contrast, employment excise taxes—Social Security and Medicare matching contributions—constitute the “non-trust fund” portion of federal employment taxes because the employer pays them directly, never holding them in “trust.” SeeI.R.C. §§ 3111, 7501; see also Diamond Plating Co. v. United States, 390 F.3d 1035, 1038 (7th Cir.2004). Under I.R.C. § 6672, the individual responsible for “collect[ing] such tax, or truthfully account[ing] for and pay[ing] over” the trust fund portion of federal employment taxes may be personally liable to the IRS for a “willful[ ]” underpayment of the trust fund portion. I.R.C. § 6672. Personal liability does not attach to an employer's underpayment of the non-trust fund portion. See id.

Personal liability...