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United States District Court, Northern District of Illinois, E.D

November 30, 1982


The opinion of the court was delivered by: Shadur, District Judge.


Edward J. Brown ("Brown") has sued the United States to recover taxes assessed and collected under Section 6672 of the Internal Revenue Code of 1954, 26 U.S.C. § 6672.*fn1 In response the United States filed a counterclaim against Brown and Wayne D. Ross ("Ross") for civil penalty assessments under Section 6672, and it now seeks summary judgment against Brown.*fn2 For the reasons stated in this memorandum opinion and order the United States' motion is granted in part and denied in part.


From 1967 to 1972 Brown was president, a director and owner of one-third of the voting stock of Marx Industrial Maintenance, Inc. ("MIMI"). Ross became MIMI's comptroller in late 1969 and a director in April 1970, serving in both capacities until sometime in 1971.

In April 1970 MIMI paid over $90,000 in delinquent 1969 employee withholding and social security (FICA) taxes. MIMI failed to make required payments of such taxes due for the second and third quarters of 1970 and for all of 1972. MIMI ceased business operations sometime in 1972, when all its corporate assets were sold and the net proceeds used to pay some of its delinquent federal withholding taxes.

In March 1978 the Internal Revenue Service ("IRS") assessed Brown $188,836.89 ($151,038.59 for the two 1970 quarters, and $37,798.30 for 1972) plus interest under Section 6672.*fn4 Contemporaneously IRS assessed Ross for the 1970 amount plus interest.

In May 1980 Brown paid IRS $607.18, the withholding tax due on his own wages from MIMI in 1972. In May 1980 Brown filed a claim for refund of his $607.18 payment plus interest. In July 1980 the IRS disallowed Brown's claim, and in October 1980 Brown sued to recover his payment. In turn the United States counterclaimed against Brown for $188,229.71 (the IRS assessment less Brown's payment) and against Ross for $151,038.59, in each case plus interest.*fn5 On May 18, 1982 Ross consented to entry of judgment against him in the full amount sought by the United States.

Applicable Law

Section 6672 is obviously strong medicine. It was "designed to assure compliance by the employer with its obligation to withhold and pay the sums withheld, by subjecting the employer's officials responsible for the employer's decisions regarding withholding and payment to civil . . . penalties for the employer's delinquency." Slodov v. United States, 436 U.S. 238, 247, 98 S.Ct. 1778, 1785, 56 L.Ed.2d 251 (1978). Imposition of personal liability on corporate officials is meant to counter the temptation to use the funds collected for corporate purposes. Id. at 243, 98 S.Ct. at 1783. Amounts withheld from employees' wages are, after all, taken from the employees' pockets to satisfy their taxes due the United States. When the United States automatically credits the employees' taxes with the withheld amount, the delinquent employer has converted government money.

Two avenues are potentially available for escape from Section 6672. They stem from its use of the terms "person" and "willfully."

First, Section 6671(b) provides a "person" subject to penalties under Section 6672 is a corporate officer or employee who "is under a duty to perform the act in respect of which the violation occurs." In other words, only a person who had the responsibility for collection and payment of the withheld taxes is liable under Section 6672. Slodov, 436 U.S. at 245, 98 S.Ct. at 1784; Feist v. United States, 607 F.2d 954, 957 (Ct.Cl. 1979).

Second, a finding a corporate official acted "willfully" under Section 6672 requires a showing of personal fault. Slodov, 436 U.S. at 254, 98 S.Ct. at 1788; Feist, 607 F.2d at 962. Our Court of Appeals has held "willful" conduct denotes "intentional, knowing and voluntary acts" or "a reckless disregard for obvious or known risks." Monday v. United States, 421 F.2d 1210, 1215 (7th Cir.), cert. denied, 400 U.S. 821, 91 S.Ct. 38, 27 L.Ed.2d 48 (1970); Garsky v. United States, 600 F.2d 86, 91 (7th Cir. 1979). Mere negligence is not sufficient to constitute "willfulness." Feist, 607 F.2d at 961. But at the same time the government need not show either (1) bad motive — the specific intent to defraud it or deprive it of revenue — or relatedly (2) the absence of reasonable cause or a justifiable excuse. Monday, 421 F.2d at 1216.

In opposing the summary judgment motion, Brown is entitled to all reasonable inferences in his favor from the facts of record, United States v. Diebold, Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962), including facts contained in the United States' submissions, see Thornton v. Evans, 692 F.2d 1064 at 1074 (7th Cir. 1982). Granting Brown all the favorable inferences due, this Court finds there is no genuine issue of fact material to Brown's liability for the two 1970 quarters, but there is such an issue as to the year 1972. Each will be discussed in turn.

Brown's Liability

Brown's own deposition (see references at United States Mem. 5-7) concedes the many facts that establish conclusively Brown was a "responsible person" for purposes of Section 6672 liability throughout the 1970 and 1972 periods. Those facts track the checklist of determinative factors endorsed by our Court of Appeals. Monday, 421 F.2d at 1214-15, citing Datlof v. United States, 252 F. Supp. 11, 32-33 (E.D.Pa.), aff'd, 370 F.2d 655 (3d Cir. 1966), cert. denied, 387 U.S. 906, 87 S.Ct. 1688, 18 L.Ed.2d 624 (1967).

Indeed Brown himself does not challenge his being a "responsible person" (Ans. Mem. 6). Brown's argument goes rather to his alleged lack of willfulness, and that argument takes different forms in relation to MIMI's 1970 and 1972 delinquencies.

1. 1970 Delinquencies

Brown argues his "lack of willfulness stems from his lack of knowledge that the taxes in question were not ultimately being paid" (Ans. Mem. 10, emphasis added; see also id. at 4-5) in 1970. Brown has to insert the qualifying adverb because he has admitted he knew the withheld taxes were being paid at least 30 days late throughout 1970. Dep. 67-70, 74, 85-86, 132, 142; Ans. Mem. 4.

In other words, Brown contends he lacked knowledge of the extent or "seriousness" of MIMI's delinquency, and he argues now (Ans. Mem. 10) his "mistake" as to the extent of that liability shows he lacked the requisite willfulness under Section 6672. In Brown's view a four-week level of delinquency (scarcely chicken feed, for his own testimony refers to $73-83,000 owing the government, Dep. 74) "was acceptable," Dep. 68.

Even if Brown's version of the facts is simply taken as true, however, he clearly acted willfully for Section 6672 purposes. As already stated, in April 1970 MIMI had raised new capital to pay a $90,000 withholding tax delinquency for 1969, and Brown has confirmed he was fully aware of MIMI's history of not paying such federal taxes. Dep. 66, 92-93, 98. When that admitted awareness extended to the continuous delinquencies throughout 1970 — confirmed by his review of monthly balance sheets (Dep. 70, 74, 86) — it is clear Brown had the knowledge necessary as an ingredient of willfulness. Despite that knowledge Brown continued in 1970 to pay various MIMI creditors in preference to the United States. Statement of Uncontested Facts ¶ 11. On the facts Brown's case is thus indistinguishable from the situation described in Garsky, 600 F.2d at 91 (citations omitted):

  The willfulness requirement of Section 6672 is
  satisfied if the responsible person acts with a
  reckless disregard of a known risk that the trust
  funds may not be remitted to the Government such
  as by failing to correct mismanagement after
  being notified that the withholding taxes have
  not been duly remitted . . . A responsible
  person's use of funds, or his knowledge of the
  use of funds for payments to other creditors
  after he is aware of the failure to pay the
  withholding tax, is willful conduct within the
  scope of Section 6672 . . . Taxpayer acknowledges
  that this is precisely the situation in which he
  finds himself.

In short, Brown had notice of MIMI's past delinquencies and at least of the monthly deficiencies throughout the two 1970 quarters at issue. It is entirely irrelevant that he may not have known just how large the deficiencies were. As an admittedly "responsible" corporate official he had a duty to assure withholding and FICA taxes were actually paid as required. Brown simply failed to discharge his duty.*fn6 See Garsky, 600 F.2d at 91. Brown's own version of the facts establishes his 1970 willfulness in Section 6672 terms. At a minimum he was reckless in his disregard of the known risk MIMI's taxes were not being paid as required.

2. 1972 Delinquencies

About April 1971 an outside audit revealed the full extent of MIMI's 1970 tax delinquencies. Statement of Uncontested Facts ¶ 13. Shocked at the amount involved — far greater than the "about four weeks behind" he had thought — Brown blew the whistle by going to the IRS to tell them of the debt due. Dep. 163.

From that time forward the IRS was literally on the inside of MIMI's operations, and literally so on a daily basis. One of its IRS Agents was given an office and a desk in MIMI's offices, "establishing a pattern of payment so that we could hopefully survive and pay off the debt we didn't know existed" (Brown Dep. 233). "We were living with an IRS agent" (id. at 173), and Brown understood the large payments of withholding taxes being made under the agent's scrutiny were covering all current quarters in full, as well as paying a small amount toward the old delinquent taxes (id. at 171-72, 174, 250-51).*fn7 That situation continued for the rest of 1971 and all of 1972, until MIMI's assets were sold to American Airlines (also with IRS approval, id. at 35-36), with the net proceeds of sale being paid to the IRS (id.).

Brown argues (Ans. Mem. 12) those facts should estop the government from asserting his willfulness after April 1971. Estoppel against the government poses a terribly difficult burden, though,*fn8 and one it is unnecessary for Brown to shoulder.

With the requisite reasonable favorable inferences drawn in Brown's favor, there are at least genuine issues of material fact as to Brown's willfulness as to the 1972 quarters for which the government has asserted a claim. There has really been no showing at all that Brown knew of any non-payment of taxes for those quarters, or that his understanding they were being paid was "a reckless disregard for obvious or known risks."*fn9 In fact there is a serious question whether another requisite element of Section 6672 liability has been satisfied: a showing that other creditors were paid in preference to the United States.*fn10

Indeed it is an understatement to characterize the record as posing genuine issues of fact to forestall summary judgment in the United States' favor. Its factual treatment of the 1972 "willfulness" issues has been almost nonexistent, and its legal treatment of those issues has been at most perfunctory (R. Mem. 6). This Court has made the point elsewhere that a party may not hold back on a motion for summary judgment, planning to give the matter its best shot afterward if it is unsuccessful.*fn11 Given the present procedural posture, however, this Court can only deny the 1972 aspect of the United States' motion.


There is no genuine issue of fact material to Brown's liability for the Section 6672 assessments covering the second and third quarters of 1970. Accordingly the United States is granted summary judgment in the amount of $151,038.59 plus interest as allowed by law. Summary judgment is denied as to the Section 6672 assessments made for 1972. This Court will await submissions from the parties before the next status date as to a possible Fed.R.Civ.P. 54(b) determination as to the 1970 judgment and the appropriate next step as to the 1972 dispute.

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