Appeals from the United States District Court for the Eastern District of Wisconsin. No. 74-C-501 -- Robert W. Warren, Judge .
Before Fairchild, Chief Judge, Tone, Circuit Judge, and Leighton, District Judge.*fn*
This case involves a 100% penalty assessment levied against John and Ruth Holcomb (Taxpayers) under § 6672 of the Internal Revenue Code of 1954 for failure to pay withholding taxes due from the corporation of which they were officers.
This is the second time this case has been before this court. In the first appeal, reported at 543 F.2d 1185 (7th Cir. 1976), we reversed the summary judgment granted to the government for the unpaid balance owing on this assessment and remanded the case for trial. Although the subsequent trial resulted in a jury verdict in favor of Taxpayers, the district court granted judgment notwithstanding the verdict against Mr. Holcomb on part of the government's claim. The district court also denied Taxpayers' request for attorney's fees pursuant to 42 U.S.C. § 1988. The present appeals challenge each of these rulings.*fn1 We affirm.
John G. Holcomb and his wife, Ruth E. Holcomb, were president and vice-president, respectively, of Lakeshore Transit-Kenosha, Inc. (Lakeshore). After encountering financial difficulties, Lakeshore failed to pay employment taxes due for the last two quarters of 1968 and the first quarter of 1969. Lakeshore filed a petition in bankruptcy in February of 1969.
In May of 1972, the IRS made a 100% penalty assessment in the amount of $40,019.51 against the Holcombs as responsible persons under § 6672 of the Internal Revenue Code.*fn2 Under that section, responsible persons are liable for wilfully failing to pay over withheld income taxes and the employee share of FICA taxes. Such taxes, for which officers of a corporation can be held personally liable, are known as "trust fund" taxes.*fn3 Two years later, on May 23, 1974, the IRS received $29,682.89 pursuant to its claim against Lakeshore in the bankruptcy proceedings. The government first applied $12,222.23 against the non-trust fund portion of Lakeshore's tax liability and then allocated the remaining funds to the trust fund portion.
The penalty assessments and amounts allocated from the bankruptcy proceeds to trust fund taxes were as follows:
Quarterly Penalty Bankruptcy Remaining
Period Assessments Proceeds Due
9/30/68 $11,923.64 $11, 923.64 0
12/31/68 18,307.43 5,536.92 $12,770.51
3/21/69 9,788.44 0 9,788.44
Prior to the disbursement of the bankruptcy proceeds the Holcombs had paid the sum of $2,700 on the penalty assessment. The amount owing was also reduced by the amount of $1,238.22 which the IRS withheld from the Holcombs' personal income tax refunds for 1972 and 1973.
This litigation began when Taxpayers filed an action in district court after their claim for refund of the amounts paid by and withheld from them was denied by the IRS. The government counter-claimed for the unpaid balance of the penalty assessment. The district court granted the government's motion for summary judgment on its counter-claim. The first appeal followed.
In reversing, this court remanded the case for trial on the following issues: (1) whether Mrs. Holcomb was a responsible person under § 6672; (2) whether waivers signed by the Taxpayers in September, 1971 extending the statute of limitations with respect to the third and fourth quarters of 1968 were effective; (3) whether the government and the Holcombs had entered into an agreement that the bankruptcy proceeds would be first allocated to trust fund portions of corporate liability; and (4) whether Taxpayers were estopped from raising issues 2 and 3 with respect to ...