United States District Court, Northern District of Illinois, E.D
November 30, 1982
EDWARD J. BROWN, PLAINTIFF,
UNITED STATES, DEFENDANT.
The opinion of the court was delivered by: Shadur, District Judge.
MEMORANDUM OPINION AND ORDER
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
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.
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
Two avenues are potentially available for escape from
Section 6672. They stem from its use of the terms "person" and
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 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
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,"
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
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.
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
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
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