United States District Court, Northern District of Illinois, E.D
August 29, 1984
CARL LATIMER, PLAINTIFF,
UNITED STATES OF AMERICA, DEFENDANT AND COUNTERPLAINTIFF, V. FREDERICK VAN METER, COUNTERDEFENDANT.
The opinion of the court was delivered by: Shadur, District Judge.
MEMORANDUM OPINION AND ORDER
Carl Latimer ("Latimer") originally sued the United States
under 26 U.S.C. § 7422 ("Section 7422"*fn1) for refund of
withholding taxes assessed against, and paid by, him. As is
typical in these cases,*fn2 the United States counterclaimed
against Latimer and Frederick Van Meter ("Van Meter") for taxes
assessed under Section 6672.
Now the United States has moved under Fed.R.Civ.P. ("Rule")
56 for summary judgment against each individual. For the
reasons set forth in this memorandum opinion and order, its
motion is granted.
During the tax periods in question*fn4 Latimer was
President and Executive Director, and Van Meter was Secretary,
of the Coalition for United Community Action ("Coalition")
(Latimer Dep. 5-6; Van Meter Dep. 5). Coalition received its
funds from several agencies (ultimately deriving their funds
from the federal government) for use in hiring disadvantaged
minority youth ("trainees") and purchasing abandoned
buildings. Coalition then put the trainees to work
rehabilitating the abandoned buildings (Latimer Dep. 6-7).
Coalition also used its funds to maintain an office space and
To receive a funding allotment, Coalition submitted a
proposed budget to each funding agency, which then approved a
grant to Coalition for that fiscal year (Latimer Dep. 7-10).
Coalition's budgets included amounts necessary to pay its
office staff payroll, including amounts necessary to pay the
withheld federal income and social security ("FICA") taxes for
that staff. As for the trainees, however, each budget
requested only an amount necessary to cover net payroll
— the wages actually paid out to trainees — without any
provision for federal income taxes or FICA taxes withheld on
their behalf (Latimer Dep. 20-21).
Once a funding agency had approved a grant to Coalition, the
actual draw down of funds required Coalition to submit
vouchers to the agency detailing the expense. Each funding
agency would audit the voucher and the later payments by
Coalition to make sure monies were being spent in accordance
with the budget approved by the agency (Latimer Dep. 23-27).
Latimer testified his job as Executive Director was to
oversee everything, but he mainly involved himself with making
sure the work with the trainees went smoothly (Latimer Dep.
26-27). Van Meter was responsible for keeping up on all
corporate matters (Van Meter Dep. 6). Although Latimer kept
physical custody of the Coalition's checkbooks, both Latimer
and Van Meter were required to sign all Coalition checks
(Latimer Dep. 29). Either Latimer or Van Meter could sign tax
returns on Coalition's behalf (Latimer Dep. 12). Both Latimer
and Van Meter participated in and were responsible for working
on the budgets submitted to the funding agencies (Latimer Dep.
17-18). Either had the authority to submit vouchers to the
funding agencies (Latimer Dep. 27).
Sometime in July 1978 Coalition employed a new accountant,
Coalition should not be responsible for paying FICA taxes
because not-for-profit charitable organizations are exempt
from such taxes (Latimer Dep. 32-33). That accountant
recommended communicating with an IRS agent to ask that the
FICA assessments be abated (Latimer Dep. 34). Coalition did
request an abatement, but its request was denied.*fn5 Thus
wholly apart from the level or extent of their prior
knowledge, at least as of July 1978 both Latimer and Van Meter
specifically knew the withheld taxes had not been paid over to
the United States (Latimer Dep. 32; Van Meter Dep. 7-8).
In March 1981 the United States' Internal Revenue Service
("IRS") assessed each of Latimer and Van Meter $74,011.97*fn6
under Section 6672 for failure to pay over income and FICA
taxes withheld from employees' salaries. Latimer paid $798.04
and filed a claim for refund with the IRS, which was denied.
Section 6672 Liability
Employers are required to withhold FICA taxes and federal
income taxes from their employees' wages (Sections 3102 and
3402). Those amounts are then held in trust for the benefit of
the United States (Section 7501(a)). If an employer fails to
collect, account for or pay over such trust funds to the
United States, Section 6672 allows the IRS to assess a 100%,
penalty against those responsible for such failure. That
penalty is separate from and in addition to the employer's
liability for the tax due and owing. Howard v. United States,
711 F.2d 729, 733 (5th Cir. 1983).
Section 6672(a) provides:
Any person required to collect, truthfully
account for, and pay over any tax imposed by this
title who willfully fails to collect such tax, or
truthfully account for and pay over such tax, or
willfully attempts in any manner to evade or
defeat any such tax or the payment thereof,
shall, in addition to other penalties provided by
law, be liable to a penalty equal to the total
amount of the tax evaded, or not collected, or
not accounted for and paid over. No penalty shall
be imposed under section 6653 for any offense to
which this section is applicable.
"Person" is defined to include (Section 6671(b)):
an officer or employee of a corporation, or a
member or employee of a partnership, who as such
officer, employee, or member is under a duty to
perform the act in respect of which the violation
Thus a Section 6672 penalty can be assessed against any person
who, though under a duty to collect, account for or pay over
the withheld taxes (in common parlance the "responsible
person"), willfully fails to do so. Slodov v. United States,
436 U.S. 238
, 245-50, 98 S.Ct. 1778, 1784-86, 56 L.Ed.2d 251
Latimer and Van Meter launch a multiple attack to resist the
assessed penalties, claiming:
1. They are not responsible persons, because
they performed solely ministerial functions in
distributing funds provided by Coalition's
2. They did not willfully fail to collect or
pay the taxes, because:
(a) Coalition's funding contracts with the
funding agencies left Latimer
and Van Meter with no discretion as to which
creditors received money.
(b) They had "reasonable cause" for not
paying the taxes.
Each argument will be addressed in turn.
1. "Responsible Person"
Adams v. United States, 504 F.2d 73, 75-76 (7th Cir. 1974)
(citations omitted) summarized the "responsible person" concept
The "person" who is responsible for the payment
of corporate taxes within the meaning of § 6672 is
that individual who has the final word as to what
bills should or should not be paid, and when. . . .
In this context, the word "final" means significant
rather than exclusive control over the disbursal of
funds. . . . Moreover, although the liability for
failure to collect, account for, and pay over
withheld taxes usually attaches to those high
corporate officials who have the power and
responsibility within the corporate structure for
seeing that taxes withheld from various sources are
remitted to the government, . . . the party subject
to the penalty for the corporation's failure to pay
the taxes due is not always or necessarily an
official of the delinquent corporation. . . . The
fact of the matter is that the responsibility for
nonpayment of the tax includes all those so
connected with the business as to be responsible
for the performance of the act in respect of which
the violation occurs.
Haffa v. United States, 516 F.2d 931
, 936 (7th Cir. 1975) has
put the matter more simply:
The key to liability under section 6672 is
control of finances within the employer
corporation: the power to control the
decision-making process by which the employer
corporation allocates funds to other creditors in
preference to its withholding tax obligations.
Here Latimer's and Van Meter's own depositions show they
were in sole charge of submitting the budgets to the funding
agencies, submitting vouchers for payment and paying the bills
from funds provided. Clearly they could have provided in the
budgets for amounts necessary to pay FICA and income taxes
withheld from employees.
Moreover they had control over which creditors actually were
paid with the funds provided. Howard, 711 F.2d at 734-35
demonstrates a fortiori that the funding agencies' audit of
fund expenditures (even were it assumed such an audit was
tantamount to an order) was not enough to relieve the taxpayers
from their duty to collect and pay the taxes. In Howard the
person in charge of paying bills was held a Section 6672
"responsible person" despite orders from his superior to pay
money to other creditors rather than satisfying the tax
obligations. And that was so even if paying the taxes meant he
violated his employment contract, creating a risk of being
fired. Here the fact Latimer and Van Meter may arguably have
breached their funding contracts with the funding agencies by
paying the taxes*fn8 did not relieve them of responsibility
for payment of those taxes.
Latimer's and Van Meter's argument in this respect is no
more than makeweight. Both are responsible persons under
2. "Willful" Failure
In the withholding tax context our Court of Appeals has
consistently defined "willfulness" in these terms:
a voluntary, conscious or intentional — as opposed
to accidental — [decision] not to
remit funds properly withheld to the Government.
Garsky v. United States, 600 F.2d 86
, 91 (7th Cir. 1979),
quoting Monday v. United States, 421 F.2d 1210
, 1216 (7th
Cir.), cert. denied, 400 U.S. 821
, 91 S.Ct. 38
, 27 L.Ed.2d 48
(1970). No bad or evil purpose need be proved, as the case law
in criminal tax prosecutions has often indicated (though even
in that respect our Court of Appeals has tempered the required
showing; see United States v. Koliboski, 732 F.2d 1328
(7th Cir. 1984); United States v. Moore, 627 F.2d 830
, 833 (7th
Cir. 1980), cert. denied, 450 U.S. 916
, 101 S.Ct. 1360
L.Ed.2d 342 (1981)).
Latimer and Van Meter first contend Coalition's funding
contracts allowed them no discretion in the payment of funds
to creditors, rendering any failure to pay taxes non-willful.
That argument is without merit.
Brown v. United States, 591 F.2d 1136, 1141-42 (5th Cir.
1979) is instructive on that score. Brown rejected a corporate
officer's assertion of non-willfulness based on the
corporation's undercapitalization and the resulting restriction
on funds. As the court sensibly pointed out (in language
strikingly applicable to this case), the undercapitalization
itself was willful. Here both Latimer and Van Meter prepared
Coalition's budgets for submission to the funding agencies and
never requested adequate monies for the trainees' withholding
taxes, even though they reported such taxes to the IRS as
having been withheld. Their failure to request adequate monies
not only bore on their responsibility (see n. 8) but was itself
a willful act.
But a finding of willfulness is not dependent on the willful
undercapitalization of Coalition. At least by mid-1978 both
Latimer and Van Meter knew withheld taxes had not in fact been
paid over to the government. Since that time Coalition had
funds that could have been used to pay the taxes (United
States Ex. 12). Latimer's and Van Meter's failure to pay the
unpaid taxes with those available funds is willful as a matter
of law. Howard, 711 F.2d at 735 (holding the individual's
contract-breach defense did not negate willfulness any more
than it did his responsible-person status); see also Garsky,
600 F.2d at 91.
Latimer and Van Meter next urge their non-payment of taxes
was not willful because they had a "reasonable cause" for not
paying such taxes. Our Court of Appeals appears to have put
that defense to rest ten years ago in Monday, 421 F.2d at 1216.
See discussion in Harrington v. United States, 504 F.2d 1306,
1315-16 (1st Cir. 1974).
Even on the assumption a "quite-limited-in-scope" exception
does exist in some quarters (see Howard, 711 F.2d at 736), the
reasons Latimer and Van Meter advance as "reasonable cause" are
not persuasive. As they would have it:
1. They unwittingly waived Coalition's
exemption from FICA taxes by paying such taxes
for three consecutive quarters (Section
3121(k)(4), repealed P.L. 98-21, Title I, §
102(b)(2), Apr. 20, 1983). Hence the IRS should
have allowed Coalition's request to abate the tax
assessment, and Latimer and Van Meter had
reasonable cause for not paying it.
2. They relied on an IRS agent's advice to file
a request for abatement of the assessment due to
the FICA tax exemption. That gave them reasonable
cause for waiting and not paying the taxes.
That first argument was the crux of the allegations in
Latimer's complaint here. Hornbook law teaches the taxpayer
has the burden of proving the IRS assessment of taxes is
incorrect. See, e.g., Griffin v. United States, 588 F.2d 521
530 (5th Cir. 1979). Yet Latimer and Van Meter have presented
no facts at all that would give rise to even an inference the
IRS was wrong in its assessment, nor have they cited any legal
authority to invalidate Coalition's waiver of the exemption. In
short they have not even attempted to meet their burden on this
As for their second assertion, Latimer and Van Meter are
held to knowledge
of the law and cannot rely on a government agent's
representation of what the law is. Heckler v. Community Health
Services of Crawford County, Inc., ___ U.S. ___, 104 S.Ct.
2218, 2225-26, 81 L.Ed.2d 42 (1984). Claimed reliance on an IRS
agent's advice to explain the problem to the IRS is not
sufficient "reasonable cause" for not paying the taxes then due
and owing. See Howard, 711 F.2d at 736.
In sum (1) "reasonable cause" is at most a limited defense
and (2) in any case Latimer and Van Meter have not shown it
existed here. This second level of their overall defense is
There is no genuine dispute as to any material fact,*fn9
and the United States is entitled to a joint and several
judgment*fn10 on its counterclaims against each of Latimer
and Van Meter (but, of course, to only one satisfaction of
judgment). Judgment is of course also entered for the United
States on Latimer's Complaint. If the United States wishes to
tender a draft judgment order as to all the claims, it should
do so immediately.