Accordingly, plaintiffs are responsible persons under § 6672. Kalb, 505 F.2d at 510; Hochstein, 900 F.2d at 546-47.
"A person willfully fails to pay withholding taxes within the meaning of section 6672 when he pays other creditors with knowledge that withholding taxes are due." Hochstein, 900 F.2d at 548. Evidence of a voluntary, conscious, and intentional preference of other creditors over the IRS, or of reckless disregard of the risk of nonpayment of the tax liability, presumptively establishes the requisite willfulness on the part of the responsible person. Barnett v. United States, 594 F.2d 219, 222 (9th Cir. 1979); Kalb, 505 F.2d at 511. Willful conduct need not "reflect 'an evil motive or an intent to defraud.'" Carter, 717 F. Supp. at 193 (quoting Kalb, 505 F.2d at 511).
It is undisputed that throughout the first quarter of 1986, plaintiffs knew that their FIT and FICA taxes for that quarter were delinquent and that PLI was paying creditors other than the IRS. Plaintiffs argue, however, that their failure to collect and pay the FIT and FICA taxes for the first quarter of 1986 was not willful because (1) in May 1986 Marad unexpectedly deprived PSI of its unrestricted discretionary funds
and (2) plaintiffs relied upon and expected to receive such funds to pay PLI's delinquent taxes. They claim that their decision to prefer creditors over the IRS during the 1986 quarter was involuntary and designed to save their business.
The willfulness requirement contained in § 6672 makes no exception on the ground urged by plaintiffs where the withholding taxes for a quarter are past due. Here, the issue of willfulness turns on the intentions and acts of plaintiffs, as responsible corporate officers on April 7, 1986, when PLI's withholding taxes were due to be remitted to the IRS. See Newsome v. United States, 431 F.2d 742, 746 (5th Cir. 1970); Thibodeau v. United States, 828 F.2d 1499, 1505-06 (11th Cir. 1987). Since employee withholding taxes are held in trust for the United States pursuant to 26 U.S.C. § 7501(a), plaintiffs bear the burden of showing that there were no funds available to PLI to pay the IRS when they became aware of PLI's withholding tax liabilities for the relevant dates such taxes were due during the first quarter of 1986. See Carter, 717 F. Supp. at 191.
Marad neither delayed nor terminated the ODS payments until on or after May 19, 1986, when the Lash Atlantico arrived in New York. This was approximately one month after PLI had failed to pay over withholding taxes to the IRS, the last of which were due April 7, 1986. Accordingly, plaintiffs' failure to pay PLI's withholding taxes due for the first quarter of 1986 is willful because all of Marad's conduct cited by plaintiffs as the reason for not paying these taxes occurred after the taxes were past due. See Barnett, 594 F.2d at 222 (plaintiff willfully failed to remit taxes in quarters where there had been no unexpected withdrawal of funds by third party bank prior to the date taxes were due). Nor have plaintiffs presented any evidence that PLI had insufficient funds to pay its FIT and FICA tax liabilities on any of the relevant due dates during the first quarter. Indeed, it is undisputed (1) that "Marad paid PLI over $ 3.3 million in ODS subsidies during the period from January 1, 1986 through April 30, 1986," Def.'s 3(g) Statement P 13; (2) that PLI "received approximately $ 14 million in payments from its customers" during the first quarter of 1986, id. P 14; and (3) that PLI had enough money during the first quarter of 1986 to make "payment of approximately $ 10 million to creditors other than the IRS." Id. P 15.
Plaintiffs rely on Barnett and Glenwal-Schmidt, Joint Venture v. United States, 78-2 U.S. Tax Cas. (CCH) $ 9610 (D.D.C. 1978), to argue that Marad's termination of ODS payments rendered involuntary plaintiffs' failure to pay PSI's withholding taxes when due. Plaintiffs' reliance on Barnett is misplaced, however, because the corporation of the responsible officer in that case was deprived of funds by a creditor-bank before certain withholding taxes were due, and therefore was unable timely to remit those taxes to the IRS. See Barnett, 594 F.2d at 221-22.
Glenwal-Schmidt also is inapposite, for two reasons. First, as in Barnett, the corporation responsible for paying taxes in Glenwal-Schmidt was deprived of necessary funds before the withholding taxes were due for the relevant quarter. Second, Glenwal-Schmidt concerned the application of 26 U.S.C. §§ 6651(a)(2) and 6656 rather than § 6672. Sections 6651(a)(2) and 6656 differ significantly from § 6672 in that they expressly provide that a penalty may not be assessed when the corporation or delinquent taxpayer shows that its failure timely to pay is "due to reasonable cause and not due to willful neglect."
Accordingly, plaintiffs' failure to pay the government the withholding taxes due for the first quarter of 1986 was willful within the meaning of § 6672.
C. Reasonable Cause
Plaintiffs argue that they had reasonable cause to act as they did in failing to pay PLI's FIT and FICA taxes when due during the first quarter of 1986 and therefore are not liable under section 6672.
A reasonable cause defense to a claim of willfulness under § 6672 is of "very limited application." See Kalb, 505 F.2d at 509 (citing Newsome, 431 F.2d at 746-47 & n.11). A "taxpayer's expectation that sufficient funds would be available at the end of the tax quarter does not make his behavior any less willful" and is not ground to assert a reasonable cause defense. Thibodeau, 828 F.2d at 1506; Wall v. United States, 592 F.2d 154, 163 (3d Cir. 1979) (failure to pay withholding taxes "in the hope that things would get better" and that taxes would eventually be paid does not constitute reasonable cause). Accordingly, Plaintiffs were without reasonable cause (1) to pay PLI employees their net wages without paying the FIT and FICA taxes thereon to the United States, and (2) to prefer creditors over the IRS during the first quarter of 1986, based on the belief that PLI would have sufficient funds in the near future to erase PLI's withholding tax delinquencies for the first quarter of 1986.
Plaintiffs contend that the Government is estopped from assessing a 100% penalty against them pursuant to § 6672 because (1) after PLI filed for bankruptcy, the IRS agreed in December 1989 to permit PLI's new management, Cold Spring Shipping, to pay the reorganized corporation's withholding tax obligation in installments; (2) in the Spring of 1986, Marad withheld from each subsidy payment due PLI an amount in repayment of its working capital loans larger than the tax assessment claimed by the IRS in this action; and (3) Marad by its positions in the bankruptcy proceeding "deprived plaintiffs of control over the cash in the bankruptcy estate that plaintiffs could have used to pay the taxes claimed in this action." Pls. Mem. in Supp. at 67.
Plaintiffs offer no arguments in support of claims (2) and (3). As for claim (1), the Second Circuit has held that "an individual's liability under section 6672 is separate and distinct from the corporation's tax liability," Hochstein, 900 F.2d at 549 (citations omitted), and that the IRS's compromise of a claim against a bankrupt corporation does not release responsible corporate officers from their direct liability or shield them from a 100% penalty under § 6672, Spivak v. United States, 370 F.2d 612, 615-16 (2d Cir.), cert. denied, 387 U.S. 908, 18 L. Ed. 2d 625, 87 S. Ct. 1690 (1967); see Hochstein, 900 F.2d at 549 (citing Spivak); accord Smith, 894 F.2d at 1555. The only case upon which plaintiffs rely in support of their proposition, McCarty v. United States, 194 Ct. Cl. 42, 437 F.2d 961 (Ct. Cl. 1971), does not reflect the law of this Circuit under Spivak. See Reph v. United States, 615 F. Supp. 1236, 1243 (N.D. Ohio 1985). Accordingly, the IRS's settlement of claims against PLI in bankruptcy proceedings in 1989 and 1990 does not now estop it from assessing and collecting a 100% penalty against plaintiffs pursuant to § 6672 for PLI's FIT and FICA taxes past due for the first quarter of 1986. Furthermore, when Cold Spring Shipping assumed control of PLI in October 1989, it had no duty under § 6672 to use new revenues generated after October 1989 to satisfy the withholding tax liabilities incurred for a tax period preceding its control. See Slodov, 436 U.S. at 251-60.
Finally, plaintiffs contend that the Government has failed to demonstrate the amount of FIT and FICA withholding taxes still due from PLI for the first quarter of 1986. This argument does not defeat defendant's motion for summary judgment.
The Skourases were assessed a principal amount of $ 549,401.73. There is no evidence on the record that during the first quarter of 1986 PLI made any payments toward its employees withholding tax liabilities for that quarter. The PLI checks to the IRS during the period from January 1, 1986 through May 8, 1986, all show that the checks were payments of liability for quarters other than the first quarter of 1986. Indeed, on the Form 941 filed by PLI on April 30, 1986, PLI itself asserted that it had made no payments to satisfy its first quarter 1986 employee withholding tax liabilities. Accordingly, there is no evidence that PLI's FIT and FICA tax delinquencies for the first quarter of 1986 were less than the amount assessed.
For the reasons set forth above, the Government's motion for summary judgment pursuant to Rule 56 is granted.
IT IS SO ORDERED.
Dated: New York, New York
June 14, 1993
Robert P. Patterson, Jr.