The opinion of the court was delivered by: William T. Hart, District Judge.
MEMORANDUM OPINION AND ORDER
This action is brought by David Schoen, Peter Schoen and
Cadwallader & Johnson ("C & J"), seeking a declaration that
$52,383 paid by C & J's co-assignees for the benefit of creditors
was improperly applied by the Internal Revenue Service (the
"Service"). Plaintiffs allege the Service applied this payment to
the non-trust fund portion of taxes admittedly due from C & J,
despite notice that these amounts were to be applied to the trust
fund portion of those taxes. Since the Schoens are responsible
corporate officers, as defined in sections 6671(b) and 6672 of
the Internal Revenue Code ("IRC"), they are personally liable for
trust fund taxes (but not non-trust fund taxes) not paid over by
C & J to the Service. Currently before the Court is the
government's motion to dismiss.
Despite plaintiffs' amendment of the complaint after the
government's instant motion to dismiss was filed, the amended
complaint contains no allegations that the Schoens paid any
portion of the tax assessments made against them or filed claims
for refund, as required by IRC § 7422(a). Therefore, David Schoen
and Peter Schoen must be dismissed as parties to this action.
The government concedes that when a taxpayer submits a
voluntary payment to the Service, he is entitled to designate the
tax liability to which the payment will be applied. Rev.Rul.
73-304, 1973-2 Cum.Bull. 42 and Rev.Rul. 73-305, 1973-2 Cum.Bull.
43. The Seventh Circuit has recently interpreted a payment made
by an assignee for the benefit of creditors to be such a
voluntary payment, so long as no court has become involved in or
ordered the payment. Muntwyler v. United States, 703 F.2d 1030
(7th Cir. 1983). However, where the taxpayer fails to designate
how the Service is to apply the payment, the Service is free to
apply the funds as it sees fit. 703 F.2d at 1032. Therefore, if C
& J's co-assignees properly designated their choice of how the
payment was to be applied, the service was bound to follow their
instructions. The attempted designation fails for three separate
First, the attempted designation was not made by the proper
party. In Muntwyler, the assignee for the benefit of creditors
designated how the payment was to be applied, while here, C & J's
attempted to make the designation. When C & J made the assignment
for the benefit of creditors, it assigned as well the power to
make such a designation. Therefore, the letter from C & J's
attorney had no effect. The "ratification" of the co-assignees,
dated November 11, 1983, comes far too late to cure this flaw in
the attempted designation of June 18, 1982.
Second, the attempt to designate how the payment was to be
applied was not timely. See, e.g., Hirsch v. United States,
396 F. Supp. 170, 172-73 (N.D.Ohio 1975) (designation following
payment by 1-2 months held ineffective). The letter from C & J's
attorney is dated June 18, 1982 while payment was made on June
11, 1982. The fact that the payment was not applied until June
22, 1982 is irrelevant. The designation was not made prior to or
at the time of payment. The right of the taxpayer to designate
allocation of a payment is contractual in nature, the designation
being viewed as a condition of payment. But the "contract" is
complete when the payment is "accepted" by the Service. The
taxpayer cannot later unilaterally modify the terms of payment.
Third, the designation is too vague to support plaintiffs'
allegation that it directed the Service to apply the payment to
trust fund rather than to non-trust fund arrearages. See Graper
v. United States, 206 F. Supp. 173, 180 (E.D.Wis. 1962). The
letter directs the Service to apply the payment "against
principal of the tax due before any funds are applied against
penalties or interest," but does not differentiate between trust
fund and non-trust fund tax liabilities. While the affidavit of C
& J's attorney explains that he telephoned a revenue officer on
two occasions after the letter was sent, specifying application
to trust fund liabilities, these attempts to clarify the letter
came too late. The payment had been accepted without a clear
direction to apply payment to trust-fund liabilities.
Although this motion was filed seeking a dismissal, both
parties have submitted materials outside the pleadings. Thus, the
Court will treat the motion as one for summary judgment.
Fed.R.Civ.P. 12(c). In accordance with Fed.R.Civ.P. 56, the
parties were notified, at the status hearing held January 9,
1984, of the Court's intention to so treat the government's
motion. The parties indicated, at that time, that they had
already filed all materials that would be relevant to a motion
for summary judgment. Therefore, the government's motion for
summary judgment against C & J is granted.
IT IS THEREFORE ORDERED that
(1) David and Peter Schoen are dismissed as parties to this
(2) Summary judgment is entered for the United States and
against C & J. This case is dismissed.
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