January, 1985, Mr. Rabin failed to deposit federal withholding taxes, using the funds provided for this purpose to pay others instead. Withholding taxes for the period between February 12, 1985 and May 23, 1985, the date upon which Opeleika filed bankruptcy, were paid as required.
In January, 1985, Opeleika's auditors determined that Opeleika had an inventory shortage of approximately $ 3,000,000 and informed Messrs. Mortenson and Fawcett that Opeleika's December 31, 1984, inventory was overstated by approximately that amount. This decrease in Opeleika's inventory value caused the Congress loan to exceed the maximum availability. Messrs. Mortenson and Fawcett informed Congress of this shortage and scheduled a meeting with Congress representatives to discuss how to proceed under circumstances where Congress was no longer required to advance funds to Opeleika and could, if it desired, declare the loan immediately due and apply all funds received to reduce the amount due to Congress. The Congress loan was constantly over its limit and in default from the discovery of the inventory shortage until Opeleika filed bankruptcy in May, 1985.
On February 10, 1985, Mr. Rabin informed Mr. Fawcett about the unpaid withholding taxes which had accrued during the prior two months. Mr. Fawcett in turn informed Mr. Mortenson. Prior to February 10, 1985, neither Mr. Fawcett nor Mr. Mortenson were aware that such taxes were not deposited or had any reason to believe that Mr. Rabin was not carrying out Mr. Mortenson's prior instructions to deposit these taxes. Shortly thereafter, Mr. Mortenson asked Congress to fund additional amounts to pay the back withholding taxes and to enable Opeleika to continue to operate. Congress, however, refused to advance additional funds to pay the past due federal withholding taxes. Congress agreed to fund specific expenditures which it deemed necessary for Opeleika to continue to operate, such as current wages, raw materials, and utilities.
After February 12, 1985, Congress changed its funding practices because Opeleika had no loan availability and any additional advances by Congress were strictly voluntary. Congress began requiring that Opeleika representatives submit daily funding requests to Congress. Congress representatives subsequently determined which of these requests should be paid, reported its decisions to the Opeleika representatives, and advanced to Opeleika funds sufficient to pay only these amounts. These funds were transferred to Opeleika's accounts and Opeleika made the payments specified by Congress. Opeleika had no other funds except those advanced by Congress to pay its obligations. All payroll taxes due for periods after February 12, 1985, and prior to Opeleika's May 23, 1985 bankruptcy filing were paid with funds advanced by Congress.
After February 12, 1985, Opeleika requested and received funds from Congress in excess of the amount of the unpaid withholding taxes. These funds were advanced for the specific purpose of paying current wages, including current payroll taxes, buying raw materials, and covering other operating expenses approved by Congress. While Messrs. Mortenson and Fawcett did not personally make the daily requests to Congress for funds, they knew that other creditors of Opeleika were being paid from funds advanced by Congress after February 12, 1985, and that the payroll taxes for periods prior to February 12, 1985, remained unpaid.
Starting in March or early April, 1985, representatives of the Internal Revenue Service ("IRS") met with Mr. Fawcett and others at Opeleika to negotiate a plan to remit the unpaid payroll taxes. The IRS representatives emphasized the importance of keeping payroll taxes current and indicated their willingness to accept payment over time of the back taxes if Opeleika kept current. Since Congress was willing to fund current payroll taxes, Opeleika was able to comply with the requirement for current payment. Messrs. Mortenson and Fawcett hoped that they could obtain financing from either Congress or Telco to pay the unpaid withholding taxes if a reasonable payment plan could be negotiated. During April or May, 1985, Mr. Fawcett and other Opeleika representatives continued to negotiate with the IRS for a plan to pay the remaining December, 1984 and January, 1985 withholding taxes. They were not able to negotiate a plan acceptable to Congress before Opeleika declared bankruptcy on May 23, 1985.
Liability for Withholding Taxes Under the Internal Revenue Code
The Internal Revenue Code ("Code") requires employers to withhold federal income and social security taxes from their employees' wages. See 26 U.S.C. § 3102, 3402; United States v. Running, 7 F.3d 1293, 1294 (7th Cir. 1993). The withheld taxes are deemed to be a special fund held in trust for the benefit of the government. 26 U.S.C. § 7501(a); Slodov v. United States, 436 U.S. 238, 243, 56 L. Ed. 2d 251, 98 S. Ct. 1778 (1978). As such, they may not be used as working capital for the business. Cline v. United States, 997 F.2d 191, 194 (6th Cir. 1993) (citations omitted). If an employer withholds the taxes, the employee is credited with having paid them regardless of whether the employer turns the taxes over to the government. Bowlen v. United States, 956 F.2d 723, 726 (7th Cir. 1992). The government's only recourse for the payment of the withholding taxes is against the employer or against the persons responsible for remitting the taxes to the government. Id. (citation omitted); United States v. Cline, supra, 997 F.2d at 194 (citation omitted).
Section 6672 of the Code provides in part:
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.
26 U.S.C. § 6672(a). This statute, often referred to as the "100% penalty provision," imposes personal liability on individuals who are responsible for remitting federal withholding taxes from employee wages to the government but who willfully fail to do so. United States v. Running, supra, 7 F.3d at 1294.
To be liable under § 6672, an individual (1) must be a "responsible person" of the delinquent corporation, and (2) must have willfully failed to carry out the responsibilities that the tax code imposes on him or her. Bowlen v. United States, 956 F.2d 723, 727 (7th Cir. 1992) (citations omitted). Once the government has assessed an individual for nonpayment of trust fund taxes under § 6672, the individual "bears the burdens of production and persuasion to disprove his status as a responsible person who willfully failed to collect, account for, or pay over the taxes." Thomas v. United States, 41 F.3d 1109, 1113 (7th Cir. 1994) (citation omitted). Accordingly, to escape liability in this case, Messrs. Mortenson and Fawcett must show either that they were not "responsible persons" or that their actions were not "willful."
A. Responsible Person
An individual is a "responsible person" under § 6672
if he retains sufficient control of corporate finances that he can allocate corporate funds to pay the corporation's other debts in preference to the corporation's withholding tax obligations. To be responsible under section 6672, a person need not necessarily have exclusive control over the disbursal of funds or have the final word as to which creditors should be paid so long as he has significant control.