The pattern was typical. The corporate employer started experiencing cash flow problems and only sporadically forwarded checks for its accumulating employment taxes. When forwarding the checks, the corporation did not designate how the IRS should apply the payments among the components of the employment taxes. The components are the trust fund portion (consisting of the taxes withheld from the employees -- i.e., the employees' income tax withheld and the employees' share of FICA, and Medicare tax) and the nontrust fund portion (consisting of the employer's share of FICA and Medicare tax). This division between the trust fund portion and the nontrust fund portion is important, because the responsible person(s) in the corporation can be assessed the TFRP for the unpaid trust fund portion. As is typically the case, in the absence of designation, the IRS applied the payments to the nontrust fund portion for delinquent employment taxes. The IRS assessed the unpaid trust fund tax liability against Mr. Westerman, the president and owner of the corporation. He paid the amount in full, apparently $35,824.45. In the litigation, He agreed that he was liable for $28,955.15 of that amount but urged that the IRS should have allocated the payments mentioned above to the trust fund tax liability so that he was not liable for the balance.
The Court opens the discussion with a discussion of his liability for the TFRP. I find portions of that discussion confusing, so I forgo reviewing that discussion. I understand it enough to know that there is nothing new or particularly elucidating in the discussion. In broad strokes, a person is liable for the TFRP is that person had the practical authority and ability to insure the TFRP is paid and, in practical terms, caused other creditors to be paid when the TFRP was not paid. I do wonder why the Court felt it necessary to engage in the liability discussion since Mr. Westerman appears to have conceded his liability (he was, after all, the president and sole owner) and was only concerned about the IRS's allocation of the corporate payments of employment taxes.
So, I turn to that allocation issue, which involves only approximately $7,000. The Court first confirms that, in the absence of the employer's designation of how to allocate the employment tax payments, the IRS may "apply the payment first toward the employer's non-trust fund liabilities for the quarter and, only once that obligation is fully satisfied, toward the quarter's trust fund liabilities." Mr. Westerman argued that, even in the absence of a designation, the payment of employment taxes should be applied ratably to the various components of both the trust fund and nontrust fund portions of the employment taxes. Here is the Court's discussion of that issue (footnotes omitted):