Appeal from the United States District Court for the Northern District of Illinois. No. 80 C 2873 -- Frank J. McGarr, Chief Judge.
Cummings, Chief Judge, Pell, Circuit Judge, and Hoffman,*fn* Senior District Judge.
The United States appeals from a decision of the district court awarding appellee Fredric C. Muntwyler (taxpayer) a refund of $1288.30 plus interest for overpayment of taxes. The court ruled that the assignee of the assets of the taxpayer's corporation was entitled to direct that the tax payments he made to the Internal Revenue Service (IRS) be applied to trust fund tax liabilities because the payments were voluntary. The Government contends that the payments were involuntary and thus that the IRS was not bound by the assignee's directions and could apply the payments to non-trust fund tax liabilities.
Fredric C. Muntwyler was the president, treasurer, director, and majority shareholder of Air Mid-America Airlines for the period relevant to this case. Air Mid-America was an Illinois corporation formed in 1968. Beginning in late 1972, the company suffered financial losses and ceased doing business in May 1973. Because of these problems, the company failed to pay certain employees' withholding taxes (trust fund taxes) and excise taxes (non-trust fund taxes).
On June 13, 1973, the company assigned all of its assets to Bernard C. Chaitman, who served as a trustee for the benefit of Air Mid-America's creditors. Chaitman was authorized to collect debts payable to the company, sell the company's interests in the assigned assets, and pay the claims of the company's creditors.
In August 1973, the IRS filed a claim with Chaitman for unpaid corporate taxes totalling $32,242.47, representing both trust fund and non-trust fund liabilities. On August 25, 1973, Chaitman presented three checks to the IRS, totalling $12,132.93, all of which directed that they be applied to the trust fund portion of the tax liabilities. The Service accepted the checks but refused to honor the directions for application of the money to the trust fund liability; instead, it allocated the entire amount to the non-trust fund liability.
On November 3, 1976, the IRS assessed the taxpayer $18,633.21 in trust fund taxes and, on November 15, $1,030.02 in non-trust fund taxes. On April 15, 1977, the IRS credited the taxpayer's $13,526 unrelated 1976 overpayment to the withholding liabilities. On May 5, 1977, the taxpayer paid $1288.30 toward the tax liabilities, and then filed a claim for a refund. On June 6, 1980, after the IRS rejected his claim for refund of the $1288.30, the taxpayer brought this action for refund in the United States District Court for the Northern District of Illinois. On December 22, 1980, the taxpayer filed a second claim for refund with the IRS, seeking to collect the $13,526 credited from his 1976 overpayment. The IRS rejected the claim and the taxpayer amended his complaint to include a claim for a refund of this money.
Both parties filed motions for summary judgment. On February 26, 1982, the district court granted the appellee's motion, holding that the assignee's payment was voluntary and thus that the IRS should have followed his direction as to the payment. The court awarded the taxpayer $1288.30 plus interest in the amount of $550.55. The court ruled that the claim for a refund of the $13,526 in credited overpayments was barred by the statute of limitations, a ruling that the taxpayer does not contest. The Government appealed.
The Internal Revenue Code directs employers to deduct and withhold a tax upon wages paid. 26 U.S.C. § 3401(a). The withheld taxes are deemed to be held in a special fund in trust for the United States, id. § 7501(a), and accordingly every person required to collect and pay over such a tax (including an officer of the corporation, like the taxpayer here, id. § 6671(b)) is personally liable for the full amount of the tax not paid, id. § 6672. An individual, like the taxpayer, is not personally liable for unpaid non-trust fund taxes. What the taxpayer sought to do in this case was to extinguish his personal liability for unpaid trust fund taxes by having the assignee direct that the payments be credited against the trust fund liability.
When a taxpayer makes voluntary payments to the IRS, he has a right to direct the application of payments to whatever type of liability he chooses. O'Dell v. United States, 326 F.2d 451, 456 (10th Cir. 1964). If the taxpayer makes a voluntary payment without directing the application of the funds, the IRS may make whatever allocation it chooses. Liddon v. United States, 448 F.2d 509, 513 (5th Cir. 1971), cert. denied, 406 U.S. 918, 32 L. Ed. 2d 117, 92 S. Ct. 1769 (1972).
When a payment is involuntary, IRS policy is to allocate the payments as it sees fit. Policy Statement P-5-60, reprinted in Internal Revenue Manual (CCH) 1305-15. This rule has been uniformly followed by the courts. See, e.g., United States v. De Beradinis, 395 F. Supp. 944, 952 (D. Conn. 1975), aff'd mem., 538 F.2d 315 (2d Cir. 1976). Despite the appellee's objection, we accept this rule as sensible tax policy. The sole question, therefore, is whether the district court correctly held that the assignee's payment was voluntary.
The Government's position is that a payment is involuntary if it is made pursuant to administrative or judicial action. The Government claims that by submitting a claim for unpaid taxes to the assignee, the IRS took administrative action sufficient to make the resulting payment involuntary. The district court, by contrast, held that court ...