THE FEDERAL RIGHT OF CONTRIBUTION UNDER INTERNAL REVENUE CODE SECTION 6672

“IN EMPLOYERS WE TRUST”: THE FEDERAL RIGHT OF CONTRIBUTION UNDER INTERNAL REVENUE CODE SECTION 6672

Ryesky, Kenneth H

The secret wealth of commerce, and the precarious profits of art or labour, are susceptible only of a discretionary valuation, which is seldom disadvantageous to the interest of the treasury; and as the person of the trader supplies the want of a visible and permanent security, the payment of the imposition, which, in the case of a land-tax, may be obtained by the seizure of property, can rarely be extorted by any other means than those of corporal punishments.1

INTRODUCTION

The Internal Revenue Code2 (hereinafter I.R.C.) requires employers to withhold various taxes from the pay of their employees and to pay over the same to the Government.3 Pending actual transfer of the collected taxes to the government, the monies thus collected are considered to be held in “a special fund in trust for the United States.”4 Those individuals having the duty or power to collect and remit such taxes may be personally liable for amounts not in fact properly collected or remitted.5 The personal liability imposed upon the individual taxpayer by I.R.C. § 6672 is “separate and distinct” from the employer entity’s liability.6

The funds are thus commonly known as “trust funds”7 and the individual officers or employees of the employer who are responsible for collecting and remitting the taxes are commonly referred to as “responsible persons”8 or “responsible individuals”9 by the courts, and the IRS and tax practitioners.10 Many states have similar or substantially verbatim statutes,11 which are construed by the respective state courts according to the Federal courts’ constructions of Federal trust fund statutes.12

The list of who may be a “responsible person” under I.R.C. § 6672 (and the state statutes) is broadly inclusive.13 There may be more than one “responsible person,” and the existence of other responsible persons does not absolve a responsible person of his or her trust fund liability for the entire amount of taxes in question.14 Though not directly specified in the statute, the total trust fund liability is collected only once, whether from the employer entity itself or one or more responsible persons; to the extent that any one responsible person pays trust fund liability, the liability of all others is accordingly discharged.15

The Internal Revenue Service (“IRS”) may choose the responsible person or persons from whom it will collect, and may proceed against any or all such responsible persons in any order of its choosing until the entire amount due is collected.16 The availability of other responsible persons having collectable assets does not impose upon the IRS any duty to pursue or refrain from pursuing any particular responsible person.17

In 1996, as part of the Taxpayer Bill of Rights 2 (hereinafter referred to as “TBOR2”), Congress enacted a statutory right of contribution in favor of responsible persons who actually pay more than their proportionate share of trust fund penalties against other responsible persons.18 This article will discuss the right of contribution under I.R.C. § 6672.

I. HISTORY OF THE TRUST FUND STATUTE AND THE RIGHT OF CONTRIBUTION

A. Statutory Background

The prospect of tax collectors misappropriating sovereign property by commingling it with personal property was apparently a royal concern in the days of King Hammurabi.19 While the Temple stood in Jerusalem, such commingling of the shekels collected from the populace and earmarked for sacerdotal purposes was discouraged not only through fear of the Almighty Himself, but also through surveillances done by mortal humans.20 Serious penalties for not remitting collected taxes to the government were decreed in the days of the Roman Empire.21 Following such a rich and ancient tradition of holding the tax collectors and agents accountable for the tax funds they collect and handle, the Revenue Act of 1918 articulated the current American statutory scheme of imposing a personal monetary penalty separate and apart from, but equal to, unremitted thirdparty tax collections.22 The 1918 provision persisted, substantially unchanged, in the prevailing Federal tax statutes through 1954.23

Meanwhile, the national thrust of waging World War II placed obvious demands upon the public fisc, and certainly affected the financial positions of millions of Americans.24 Taxpayers who had incurred reductions in their salaries (including those who went into military service at lower remuneration than paid by their civilian jobs) often had difficulty coming up with the funds some months after pay day to cover the taxes that had been imposed upon their wages and salaries.25 New York Federal Reserve Board member Beardsley Ruml, obviously drawing upon his expertise and experience as a retail department store executive, devised a plan for national withholding of income taxes from wages.26 Ruml’s “pay as you go” plan was enacted into law in 1943, and employers were thus required to withhold income taxes from the paychecks of the American workforce.27

The withholding plan thus ameliorated both the Treasury’s strained cash flow situation and the problem of the taxpayer’s inconvenience in paying the personal income tax.28 Another advantage to the government, albeit one not commonly discussed as a specific taxation policy rationale, is that in light of the universal resentment held for taxation,29 the interposing of a third-party collection agent places the government out of immediate range of the opprobrium – rational or otherwise – of the taxpayer,30 thus leaving the shopkeeper to directly deal with the ill will of the customer on account of the imposition of a sales tax,31 or likewise, having the employer absorb much of the flak from the imposition of a tax on the labor of the working man or woman.32

By the time the smoke had cleared from World War II, America’s tax statutes and number of people in the work force had, over the course of a half century, definitively shifted the primary base of America’s tax receipts from excise to income.33

The enactment of the Internal Revenue Code of 1954 retained the basic statutory scheme in I.R.C. § 6672, albeit with more specification regarding the type of tax to which the scheme applied.34 The enactment in 1996 of TBOR2 amended I.R.C. § 6672 by giving a statutory right of contribution to responsible persons who pay the trust fund penalties,35 together with the right to know the status of the IRS’s collection efforts against other responsible persons with respect to the same trust funds.36

B. Right of Contribution

Prior to TBOR2, responsible persons who paid the trust fund penalties had no Federal statutory right of contribution from other responsible persons.37 As for a Federal right of contribution or indemnification based upon common law and not statute, in 1974 United States District Judge Raymond J. Pettine specifically requested briefings from the parties on the issue in the DiBenedetto case,38 and then after considering such briefings, found that there was no such right under Federal law.39 DiBenedetto had been called “the seminal case” on the question of the right of contribution for responsible parties under I.R.C. § 6672,40 and had been followed in many other decisions.41 With few exceptions, there was no Federal common law right of contribution prior to TBOR2.42

Various policy reasons were cited by courts for refusing to find an implied Federal right of contribution.43 Courts have recognized that the complication of a case by such claims would prolong the judicial process, and hence delay the collection of the revenue.44 Moreover, the prospect of being personally saddled with total liability for the company’s tax bill has been viewed as a strong incentive for all who may be responsible persons to proactively ensure that the trust funds are in fact properly remitted to the government.45 Focusing upon the need for retribution upon the wrongdoer, it has been observed that the penal effects of I.R.C. § 6672 would be diluted or defeated by allowing the responsible person in question to shift the burdens of his or her punishment.46 Additionally, the old equitable clean hands doctrine has also been cited as a policy reason for denying a right of contribution for trust fund penalties.47

Some states have recognized a right of contribution under state law for I.R.C. § 6672 liability,48 while other states have refused to recognize such a right.49 Such a right can arise out of a contractual agreement between the parties.50

Thus, if a responsible person prior to TBOR251 was to successfully assert a right of contribution for I.R.C. § 6672 penalties, it almost always had to be under state law, if available.52 “The variations in state law sometimes [made] it difficult or impossible to press successful suits in state courts to force a contribution from other responsible persons.”53 The claims almost always needed to be brought in a state forum, inasmuch as the Federal courts declined to exercise pendant jurisdiction of such state law claims, particularly in the context of an action by the IRS to collect the I.R.C. § 6672 penalty.54

There were several problems witih the pre-TBOR2 version of I.R.C. § 6672.55 The statute was characterized as “harsh” by several judges, albeit necessarily so.55 But if the harshness was necessary as a matter of policy, much of the unfairness of I.R.C. § 6672 prior to TBOR2 was not.57 In light of the IRS’s “pay as much as you can when you can” tax collection policies and practices,58 together with the IRS’s prerogative to pursue the responsible person or persons of its choice59 and to make settlements with any responsible person on any terms of its choosing,60 it is not difficult to imagine diverse possibilities for the unfair administration of the statute on the part of the IRS. “The IRS apparently makes no effort to administrate the penalty against potentially liable officers and directors in an equitable or fair manner.”61

This broad discretion can indeed serve to work gross injustices in situations where the one responsible party who contributed most to the delinquency disappears,62 or squanders all of his or her assets on such vices as drugs or alcohol,63 or is otherwise not an available or convenient source for the IRS to tap.64 The IRS can proactively give favored treatment to one responsible person over others, even when the favored party wielded greater and closer control over the failure to pay the taxes than the parties not so favored.65

The IRS’s general ability to control taxpayer abuse by its employees is most questionable,66 and its discretion is not always exercised on a pure cost/benefit or tax potential basis.67 Giving the tax collector discretion so broad as to determine the amount of a tax owed by any one taxpayer has long been recognized as an invitation for such abuse,68 yet such was and is precisely the discretion effectively reposed in the IRS in its enforcement of I.R.C. § 6672.69

Concerned about the unfairness inherent in I.R.C. § 6672, Congress, as part of TBOR2, amended the statute to give responsible persons the right of contribution,70 and also required the IRS to disclose its collection activities against other responsible persons for the same trust funds.71 There now is a Federal statutory right of contribution where none had previously existed. Actual payment of the tax to the IRS is a prerequisite to asserting the claim for contribution.72

II. SOME POTENTIAL ISSUES AND PROBLEMS IN ASSERTING THE FEDERAL RIGHT OF CONTRIBUTION FOR TRUST FUNDS

As with other new statutory provisions, putting the statutory theory of I.R.C. § 6672(d) into practice will likely have its ambiguous moments until a body of case law develops to give guidance as to the statute’s application.73 Several areas not explicitly spelled out in the statute, which may require judicial clarification, are now discussed:

A. Courts in Which an I.R.C. § 6672(d) Contribution Claim Will Be Heard

Aall Federal courts are courts of limited jurisdiction and require specific jurisdictional authorization to exercise their authority.74 The jurisdiction of the Federal courts in taxation matters is certainly limited.75 A Federal court’s jurisdiction is never presumed, but must be affirmatively demonstrated.76

With TBOR2’s addition of Subsection (d) to I.R.C. § 6672 there now is specific jurisdiction conferred upon Federal courts to entertain a right of contribution action for trust funds, provided that the action “is separate from, and is not joined or consolidated with” any proceeding in which the IRS seeks to collect trust fund penalties from any responsible party with respect to the underlying trust funds.77 This proviso obviates the public policy concerns over complications from a trust fund penalty contribution claim which might potentially hinder and delay the revenue collection processes.78

Assuming that there is no IRS collection action involved in the proceeding (which, for all practical purposes, would mean that the IRS is not a party to the proceeding), it is quite obvious that the Federal District Courts would have original jurisdiction in an I.R.C. § 6672(d) action for contribution because it would be a civil action “arising under” a Federal statute.79 Such actions have already been brought in at least one Federal District Court.80

Whether a Federal Bankruptcy court would have jurisdiction over an I.R.C. § 6672(d) action is more problematic.81 The Bankruptcy court, of course, would not have jurisdiction over a § 6672(d) action if an IRS claim to collect the trust fund penalty were involved; and because the IRS, as a creditor, would most highly likely be involved if the tax were not paid in full, it is very difficult to imagine a § 6672(d) claim being assertable in a Bankruptcy proceeding where the tax remains unpaid in full or in part.82 Moreover, Bankruptcy courts do not have the authority to determine the tax liabilities of parties other than the debtor at bar.83

If the IRS has been paid in full and has thereby been taken out of the picture, then there might be occasion for a Bankruptcy court to somehow deal with the matter, though sufficient case law on this point has yet to develop.84 If, for example, the debtor in Bankruptcy, having paid the trust fund penalty in full prior to insolvency, were asserting a § 6672(d) claim for contribution against another responsible person, then such would certainly be the property of the Bankruptcy estate.85 However, if the only connection to the bankruptcy were the prospects of increasing the value of the Bankruptcy estate, then the claim would not be a core proceeding in Bankruptcy,86 and therefore not a matter for a Bankruptcy judge without consent of the parties.87

If, on the other hand, the § 6672 trust fund penalty were already paid by another responsible person and a § 6672(d) claim were then in turn being asserted against the debtor, then such may well be within the jurisdiction of the Bankruptcy court as a claim by a creditor of the Bankruptcy estate.88 From a policy standpoint there should be no objection per se to such adjudication by a Bankruptcy court; after all, the allowance or disallowance of claim against a bankruptcy estate is a “core” matter over which Bankruptcy courts generally do have jurisdiction,89 and the actual payment to the IRS, albeit by a party other than the debtor in bankruptcy, should moot all objections based upon the detinue of the Treasury’s revenue on account of litigation.90

Once the § 6672 penalty is paid to the IRS, a refund action may be brought in the Court of Federal Claims.91 The jurisdiction of the Court of Federal Claims is limited to suits against the United States,92 and any actions before that court are disregarded to the extent that relief is sought against other parties.93 Accordingly, the Court of Federal Claims is not an appropriate forum for a § 6672(d) action, and indeed, that court has suspended proceedings against the United States for tax refunds where the plaintiff has simultaneously brought a § 6672(d) contribution claim against other responsible persons in another tribunal.94 The Court of Federal Claims clearly is not and should not be a forum for a § 6672(d) action.95

The United States Tax Court, in which the Respondent party is always the Commissioner of Internal Revenue who seeks to collect a tax and the Petitioner party is always the taxpayer seeking to avoid paying that tax assessment, would certainly not be the appropriate forum for an I.R.C. § 6672(d) contribution action.96

“If an act of Congress gives a penalty to a party aggrieved, without specifying a remedy for its enforcement, there is no reason why it should not be enforced, if not provided otherwise by some act of Congress, by a proper action in a State court.”97 Accordingly, Federal § 6672(d) claims might also be brought in state courts.98 State courts have had jurisdiction to entertain claims arising under other Federal statutes, including the civil rights statutes99 and the Telephone Consumer Protection Act,100 though states such as Texas seem to require a specific enabling statute from the state legislature in order for the state courts to have jurisdiction to hear complaints arising under a particular Federal statute.101 Therefore, the use of a state court forum for a Federal § 6672(d) contribution action would depend upon whether such a claim is allowed under the laws of the particular state,102 and while such claims ideally should be allowed, the explicit jurisdiction of the Federal courts over a § 6672(d) matter goes a long way towards eliminating the unfairness in those states whose courts will not countenance such claims.103

B. Statute of Limitations

Congress did not set forth a specific limitations time for bringing an action under I.R.C. § 6672(d) when it enacted the statute in 1996.104 Accordingly, the four year Federal catch-all limitations period in 28 U.S.C. § 1658 for commencing civil actions applies to I.R.C. § 6672(d) actions.105 Notwithstanding the use of the word “penalty” in I.R.C. § 6672(a), trust fund exaction (or attempted exaction) from responsible persons by the I.R.S. does not amount to a “penalty” within the meaning of 28 U.S.C. § 2462, and accordingly, the five-year period of limitation in that statute would be inapplicable to the dilatory § 6672(d) plaintiff.106

The statute of limitations being four years “after the cause of action accrues,”107 the event constituting the accrual of the cause of action must then be identified. On that score, I.R.C. § 6672(d) seems reasonably explicit on its face, entitling the responsible person bringing the § 6672(d) action to “an amount equal to the excess of the amount paid by such person [emphasis supplied].”108 Actual payment of moneys to the IRS (or, perhaps, to another responsible person in the same or another § 6672(d) action) would constitute an accrual of the action.109

Suppose, however, that the total trust fund liability had yet to be paid in full even after the responsible person bringing the I.R.C. § 6672(d) action made a payment to the IRS, or indeed, that the IRS was continuing its collection efforts against the § 6672(d) plaintiff in question. Case law has yet to develop on the question of whether the statute of limitations is tolled pending full satisfaction of the underlying tax debt, or whether a new § 6672(d) claim must be brought with respect to amounts paid after initiating the original § 6672(d) action. But the potential for judiciary inefficiency in what might be multiple causes of action is a lesser evil than the unfairness that I.R.C. § 6672(d) was designed to counteract, and is lessened all the more by the significant (though hardly perfect) likelihood that if other responsible persons are viable sources of payment then the IRS would pursue them as well. In view of the compelling purpose in enacting the statute, namely, protection from the unfairness inherent in the IRS’s broad discretionary powers to those who actually pay the trust fund taxes, the requirement of actual payment should be adhered to.110

C. Determining the “Proportionate Share of the Penalty”

I.R.C. § 6672(d) authorizes a right of contribution for “an amount equal to the excess of the amount paid by such person over such person’s proportionate share of the penalty.”111 In order to do the arithmetic to determine the amount to be sued for in a § 6672(d) action it is necessary to construe the meaning of “proportionate share.”112

A most administratively simple construction of the term “proportionate share”113 would be equal aliquot shares among responsible persons -e.g., giving one-half of the total if there were two responsible persons, or one-fifth of the total if there were five responsible persons. Such construction is most certainly not the construction intended by Congress, which identified a significant unfairness in the pattern of IRS not always going after “the person with the greatest culpability for the failure” to pay over the trust funds.114 Had Congress intended the “proportionate share” to be an equal allocation among responsible persons, there certainly was more definitive and explicit language available for it to do so.115

Moreover, though I.R.C. § 6672 operates upon any responsible person without regard to degree of fault or blame,116 many courts have spoken in terms of the relative degrees of responsibility of responsible persons.117 The concept of relative responsibility was set forth in a very graphic nautical metaphor by U.S. District Judge Whitman Knapp in one of his Unger litigation rulings:

[T]hese seemingly impartial uncalled witnesses might have established that Unger considered himself “a cabin boy on a sinking ship” whose sole duty was to follow the admiral’s orders as the latter was trying to maneuver the vessel to safety; and that he faithfully followed those orders even after being warned (by the company’s outside accountants) that if the ship ultimately sank he might follow it to the bottom of the sea while the admiral was picked up by helicopter and safely put ashore.118

Accordingly it is clear that “proportionate share” does not necessarily mean equally distributing the burden.119 Determining the “proportionate share” of the responsible person, then, must necessarily entail an analysis of the relative culpability of all responsible persons.120 Fortunately, this need not be a major judicial or administrative nightmare, because the same case law factors used to objectively determine whether a person is a responsible person under I.R.C. § 6672 can also be applied to help fix the degree of responsibility.121 A roster of these factors, derived from prior decisions, has conveniently been enumerated in the Fiataruolo opinion as follows:

[whether and to what extent the person in question]

(1) is an officer or member of the board of directors,

(2) owns shares or possesses an entrepreneurial stake in the company,

(3) is active in the management of day-to-day affairs of the company,

(4) has the ability to hire and fire employees,

(5) makes decisions regarding which, when and in what order outstanding debts or taxes will be paid,

(6) exercises control over daily bank accounts and disbursement records, and

(7) has check-signing authority.122

To which the New York State Supreme Court, Appellate Division, Third Department123 would hasten to add an eighth factor, whether and to what extent the person in question did or could have actually signed the tax returns.124 Moreover, a similar set of factors is set forth in the Internal Revenue Manual.125

Accordingly, sound established guidance does exist for objectively comparing responsible persons and fixing relative degrees of responsibility, ergo, “proportionate share,” for the purposes of an I.R.C. § 6672(d) action.126 The tribunal that determines such proportions certainly should, and quite likely will, make use of the factors articulated in case law.127

Another potential issue in determining the “proportionate share” is the degree to which a determination by one administrative agency or tribunal is valid precedent for others.128 The IRS’s determinations or collection actions or inactions certainly cannot be viewed as indicators of relative responsibility in light of the patently demonstrated lack of objectivity of that agency.129 Indeed, the IRS makes no pretensions to determine relative trust fund responsibility among responsible persons, and such was the very basis for enacting I.R.C. § 6672(d) in the first place.130 But there is no reason why a proceeding in which the decider specifically determines respective degrees of responsibility, and in which all responsible parties have had opportunity to present the merits of their respective cases, should not be valid precedent.131 Such a situation can arise, for example, where the cognizant state taxation authority imposes personal trust fund liability with respect to state trust fund taxes either before or after the IRS imposes such liability with respect to Federal taxes.132

D. Appropriate Parties to an I.R.C. § 6672(d) Action

Though I.R.C. § 6672(d) specifically tells us who is not to be a party in an action for contribution-the IRS itself133-the statute is silent as to whom, other than the party seeking contribution, must necessarily be involved in the action.134 But if all who are potentially responsible are actual parties to the action instead of being mere witnesses, “the adversary process should assure that each potential responsible person will present his or her respective view of operations within the company in the most comprehensive and convincing manner.”135 It thus would seem that, barring unusual circumstances, all potentially responsible persons should ideally be necessary parties to a § 6672(d) action if their relative degree of responsibility has not otherwise been determined or admitted.136

As a practical matter, most people who would qualify as responsible persons under I.R.C. § 6672 would know the identities of all other responsible persons from whom contribution might be claimed.137 Even if some responsible persons are overlooked, those named in a § 6672(d) action would have every incentive to implead those not sued by the first-party plaintiff.138 And the IRS must, upon request of a person it has determined to be liable for a § 6672 penalty, identify all others it has determined to be responsible persons and disclose information regarding its collection activities against such persons.139 Persons so identified by the IRS should normally be parties to a § 6672(d) lawsuit.140 If, perchance, despite all of the foregoing safeguards, a § 6672(d) action somehow goes forward to judgment without the inclusion of all responsible persons, then such an unlikely situation could potentially be remedied by an additional § 6672(d) action against such omitted parties by those who have been found liable in the first § 6672(d) action and have paid their judgments accordingly (though impleader in the initial action would obviously be a far, far preferable alternative).141

Issues regarding the identity and involvement of necessary parties to a § 6672(d) action thus seem, overall, to be little cause for concern.142 There nonetheless are conceivable situations where the issue might surface.143 These include the large employer with many units in diverse cities, several of whose geographically-dispersed personnel might technically qualify as responsible parties,144 or where a responsible party has a successor in interest.145 Even if and when such situations should arise, the courts and parties are given broad leeway to bring about the joinder of parties and/or to proceed in the absence of parties,146 and indeed, persons against whom there might be asserted a right of contribution in general are not indispensable parties to a lawsuit.147 So while it is generally quite preferable to include all responsible persons as parties to an I.R.C. § 6672(d) action, such actions can certainly go forward in cases where that ideal is unfulfilled.148

E. Interplay with the Estate Tax

Death is a taxable event,149 and though there are serious prospects for the Federal Estate Tax to be repealed,150 the law is still effective.151 Moreover, repeal of the Federal Estate Tax would not necessarily ordain the repeal of the analogous state estate tax statutes, which, in many cases, are patterned after the Federal scheme.152 Accordingly, a § 6672(d) cause of action may be relevant with respect to taxation of a decedent’s estate.153

Claims against the estate are deductible from the gross estate in computing the taxable estate.154 Such claims can include liabilities imposed by law or arising out of torts.155 “The claim must be a personal and enforceable obligation of the decedent” at the time of death.156 If the claim asserted against the estate is a judgment of a court, the judgment must be on the merits of the case.157 Where the court rendering the judgment is not the highest court in the state, the IRS may apply the law of the state as the highest court has or would apply it, and in doing so, override the judgment.158 The judgment in a collusive lawsuit not adjudicated on the merits is not necessarily accepted as a deductible claim against the estate.159

Where there is a viable right of contribution from other parties with respect to a claim against the estate, such claim must be reduced accordingly, 160 or, in the alternative, the right of contribution is an estate asset, the inclusion of which would bring about the same result.161 This is true even where that right of contribution is subsequently relinquished.162

In an Estate Tax situation, then, there would be valuation issues where a decedent either had an I.R.C. § 6672(d) right of contribution against others, or owed contribution to others.163 This would likely entail a review the facts by the IRS or other taxation authority in order to fix relative degrees of responsibility. The highly specialized estate tax function within the IRS and the various state taxation authorities 164 have long dealt with the task of valuing the assets of and the claims against estates, and can be expected to handle an asset or claim relating to I.R.C. § 6672(d) with no less expedience or competence than with any other estate asset or claim.165

F. Interplay with the Bankruptcy Law116

“[A]ny case that intertwines the provisions of the Bankruptcy Code with those of the Uniform Commercial Code can become confusing and complex.”167 “Intertwin[ing] the provisions of the Bankruptcy Code with the Internal Revenue Code” is surely no less complex. Accordingly, this article will not dwell upon “the complex, detailed, and comprehensive provisions of the lengthy Bankruptcy Code.”168

It will suffice, therefore, to mention that a § 6672(a) trust fund penalty itself is nondischargable in bankruptcy.169 And because the taxes given priority under § 507 of the Bankruptcy Code include “a tax required to be collected or withheld and for which the debtor is liable in whatever capacity [emphasis supplied],”170 which, in turn, is exempted from discharge under § 523 of the Bankruptcy Code,171 it would seem that an obligation incurred by a debtor in bankruptcy as a result of a § 6672(d) action would similarly be nondischargeable.172 Indeed, debts to third parties for taxes paid to the taxing authority by the third party have been held to be nondischargeable in bankruptcy.173

Moreover, for the purposes of § 547 of the Bankruptcy Code,174 pre-petition trust funds paid by debtor employers to the IRS or other taxation authorities do not constitute voidable preferences,175 even where the funds had been commingled with the debtors assets.176 Whether and to what extent funds which had been paid by a debtor in bankruptcy to another responsible person pursuant to an I.R.C. § 6672(d) judgment (or in settlement of the case) are similarly out of reach of the bankruptcy trustee under Bankruptcy Code § 547 awaits case law interpretation.177 If such transfers are in fact found to be voidable § 547 preferences, then the purpose of I.R.C. § 6672(d) would be defeated, unless and to the extent that the transfer was a collusive one.178

III. AVOIDING OR MINIMIZING LIABILITY IN TRUST FUND RESPONSIBLE PERSON CONTRIBUTION LIABILITY ACTIONS

Trust funds held by employers are very tantalizing sources of relief for cash flow problems.179 Once an employer has succumbed to their allure, and thus gotten into the predicament of having failed to properly remit trust fund taxes to the government, the responsible persons must then shift their focuses from damage prevention to damage control,180 and show, if possible, that there were others to blame for the failure, and that the others were more responsible.181 This can easily become a distasteful finger-pointing affair, reminiscent of the famous Thomas Nast “Tweed Ring” political cartoon depiction.182 And once the IRS is on the case, obstructing or hindering its agents in their quest for factual information and documents will, if anything, enhance the chances of being a target for IRS collection actions.183

Inappropriate attitudes and perceptions regarding the roles and obligations of responsible persons can lead to running afoul of the trust fund rules.184 Employer policies born of the attitude that the company is merely a debtor of the taxation authorities, rather than a trustee of money collected for the public fisc, are prescriptions for trouble.185 Employees in responsible positions who passively acquiesce in superiors’ directives not to pay the trust fund taxes to the taxing authorities leave themselves open to collection actions by the IRS.186 It certainly cannot be said by or about a responsible person that the nonpayment of the trust fund taxes to the taxation authorities is none of his or her concern.187 Responsible persons are required to take a certain degree of proactivity in asserting the governmental claim to the tax monies it is entitled to by statute, even, on occasion, at the risk of their jobs.188

The best way to avoid liability for contribution under I.R.C. § 6672(d) is, of course, to ensure that all trust funds are properly withheld and timely paid over to the tax collector, so that I.R.C. § 6672 and its analogous state statutes never become relevant in the first place.189 “If the statute is followed, the amount retained as taxes never leaves the employer’s possession” until it is turned over to the government.190 This ideally includes defining the duties of a particular person within the organization to remit the payments of the tax, with another person having meaningful cognizance and authority to ensure that the tax has been so remitted.191 In that regard, another section of the Internal Revenue Code, together with its corresponding Treasury Regulations, can be put to good use, because a filing or payment that complies with the timely mailing rule of I.R.C. § 7502 produces a specified paper or electronic document as evidence.192 Production of the document thus created, or a reliable copy thereof, can provide good assurances to all potentially responsible persons.193 Taking such action to avoid getting oneself ensnared into a § 6672 situation, if done correctly, also goes a long way towards preventing a trust fund failure from occurring at all, to the benefit of all potentially responsible persons and indeed, to the public treasury itself.194

CONCLUSION

Because a large bulk of tax collections by the Treasury is through employer withholding,195 trust fund liability is a necessary tool to ensure the collection of revenue for the public treasury. I.R.C. § 6672 was enacted “to assure payment of withheld taxes,”196 and “was designed to cut through the shield of organizational form and impose liability upon those actually responsible for an employer’s failure to withhold and pay over the tax.”197 But taxation, as Ricardo observed, “frequently operates very differently from the intention of the legislature by its indirect effects.”198 The harsh results of the IRS asserting the trust fund penalties are obviously not the primary legislative intent behind I.R.C. § 6672.199

Though the Federal right of contribution under I.R.C. § 6672(d) was certainly a step in the appropriate direction, there is much more that can be done by the governing authorities to apply the trust fund scheme in a fair and equitable manner; or, better still, to reduce the number of instances in which it is necessary to resort to it at all.200 For one thing, there is little to protect the lowly subordinate from the personal financial effects of the unemployment which may result from disobedience of directives from above that are contrary to the trust fund obligation.201 Though many would call for new statutory remedies to the problem, there is much to suggest that more credible and consistent enforcement of the existing remedies, criminal or otherwise, would go a long way towards curbing the trust fund abuses by employers.202 Moreover, the IRS can do its part to educate and inform the responsible persons of their responsibilities.203 But regardless of what the governmental authorities do, the ultimate responsibility rests upon the responsible persons.204

Sufficient case law guidance on the construction of I.R.C. § 6672(d) has not yet developed, and many ambiguities remain.205 As with other new statutes, the courts will eventually deal with clarifying its specific applications. Though the attorneys representing responsible persons will no doubt play a proactive role in bringing about the interpretation of the law, and will, hopefully, achieve remunerative gain for their labors in doing so, persons responsible for facilitating the tax withholding process would do well to heed Professor Siegel’s oft tendered admonishment that such legal advancements are best suited for “Somebody Else’s Case.”206

Kenneth H. Ryesky*

* B.B.A. 1977, J.D. 1986, Temple University; M.B.A., La Salle University, 1982; M.L.S., Queens College CUNY, 1999. Member of the Bar, New York, New Jersey and Pennsylvania; currently a solo practitioner attorney in East Northport, New York, and Adjunct Assistant Professor, Department of Accounting & Information Systems, Queens College CUNY, Flushing, New York; formerly Attorney, Internal Revenue Service, Manhattan District.

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