Allocation of Employment Taxes Between Trust Fund and NonTrust Fund Portions (6/28/13)

In Westerman v. United States, 718 F.3d 743 (8th Cir. 2013), here, the Eighth Circuit affirmed the district court's grant of summary judgment in a trust fund recovery penalty ("TFRP") case.  Although the decision blazes no new trails, it does offer a reasonable, if flowery, discussion of the importance of designating how payments of employment taxes are to be applied.  

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):

2. IRS's Allocation of Payments in This Case 

Westerman admits he did not affirmatively designate the five payments at issue in this case, but he contends the IRS should nonetheless have applied at least part of those payments toward WestCorp's trust fund obligations. We consider -- and, in turn, reject -- each of the propositions Westerman advances in support of this contention. 

a. Implied Designation 

First, Westerman maintains WestCorp implicitly designated the five payments at issue because the timing and amount of each payment revealed its connection to a specific month's combined trust fund and non-trust fund liability. This proposition fails because Westerman did not include information with each payment sufficient to require the IRS to match the payment to a particular unpaid liability. Each time Westerman made a payment, he deposited a check -- which likely would never reach the IRS -- along with a coupon, which would reach the IRS. Westerman admits that neither the checks11 nor the coupons designated anything other than the quarter to which the payments should apply. Furthermore, Westerman attached no additional information to the coupon, he contemporaneously gave the IRS no separate designation instruction, and he never submitted a prospective designation. 

The only decision Westerman finds to support his proposition is a "line of thought" in a bankruptcy case from the Middle District of Florida, In re Ledin, 179 B.R. 721 (Bankr. M.D. Fla. 1995), which neither binds nor persuades us. To accept the logic Westerman ascribes to Ledin would require us to reject our sister circuits' reasoning, see, e.g., Schroeder, 900 F.2d at 1149, and the common-law rule which gives creditors "the election" to allocate undesignated payments, Goddard v. Cox, (1742) 93 Eng. Rep. 1122 (K.B.) 1123; 2 Str. 1194, 1194-95. But we are not convinced Westerman interprets Ledin correctly. The Ledin court only addressed the IRS's ability to allocate deposits between quarters, not whether the IRS could allocate deposits among months within a quarter. See Ledin, 179 B.R. at 725. The IRS properly applied WestCorp's payments to the quarter listed on the payment coupon, and Westerman never directed the IRS to apply the payments to any particular month.
To be sure, WestCorp's Forms 941 for the quarters at issue listed WestCorp's monthly employment tax liabilities and at least four of the five payments corresponded precisely to a particular month's liability listed on one of the forms.But the IRS ordinarily requires Forms 941 to be submitted separately from -- and later than -- monthly tax deposits. See 26 C.F.R. §§ 31.3102-2, .3111-3, .6011(a)-1(a)(1), .6011(a)-1(e), .6071(a)-1(a)(1), .6302-1(a)-(b)(2), .6302-1(c)(1) (2001); see also Dep't of the Treasury, IRS, Instructions for Form 941, at 1 (Jan. 2001). Westerman cannot reasonably expect the IRS to match a particular payment to a line on a form submitted separately and, for all but one of the months at issue, after the payment. 

This is not a case where an IRS employee opened a single envelope containing both a form and a check and thus could easily match the check with a particular tax liability. Quite the contrary, IRS employees processing employment tax deposits typically have no access to the relevant Form 941 because employers do not file the form concurrently with their deposits. See, e.g., Dep't of the Treasury, IRS, Employer's Tax Guide (Circular E), Pub. 15, at 25-26 (2013). Even if an employer submits a late payment after filing the form, it would place an unreasonable burden on the IRS to require its employees to match a payment to a single line -- rather than the total liability -- listed on one of the many separate forms employers must file. As the Court of Federal Claims, a tribunal with significant expertise in adjudicating tax cases, explained, "[r]equiring the IRS to match an exact payment amount, without proper designation, to one of multiple different possible tax totals owed, would be unreasonable and would force the IRS to guess regarding which of numerous tax liabilities it thinks a taxpayer might wish to pay off first." White v. United States, 43 Fed. Cl. 474, 480 (1999). The White court's analysis is particularly applicable here because Westerman first informed the IRS he wanted the payments applied -- retroactively -- to particular months more than six years after WestCorp made the last payment at issue. 

b. Statute 

Second, Westerman proposes I.R.C. §§ 6672 and 7501 "limit[ ] the IRS's ability to apply" federal tax deposits the way the IRS did in his case. Plain language dooms Westerman's argument: neither section says anything about the IRS's ability to allocate employment tax payments. 

Because "the language of the act is explicit, there is great danger in" doing what Westerman would have us do, that is, "departing from the words used." Denn v. Reid, 35 U.S. 524, 527 (1836). Yet Westerman asks us, based on a mismatch of concepts harvested from the legal forests of trust and tax law, to read these sections in a manner at odds with (1) the plain language of the sections; (2) the IRS's consistent and sensible interpretation of the sections; and (3) the common-law rule underlying the IRS's right to allocate undesignated payments. "This we will not do." Barnhart v. Sigmon Coal Co., 534 U.S. 438, 454 (2002). We "find no reason to read into the plain language of the statute[s] an implicit" requirement that the IRS allocate WestCorp's payments in a way that minimizes Westerman's § 6672 liability. Winkelman ex rel. Winkelman v. Parma City Sch. Dist., 550 U.S. 516, 529 (2007). 

c. Equity 

Third, relying on a strained reading of a tax court case, Woods v. Comm'r, 92 T.C. 776, 784 (1989), Westerman proposes it is "inequitable" to allocate payments in a manner which increases the IRS's ability to collect unpaid taxes. The three paragraphs Westerman devotes to this proposition misconstrue equitable principles. Equity does not, as Westerman suggests, give courts power to make policy decisions deemed "fair" in the eyes of Article III judges. See, e.g., Lonchar v. Thomas, 517 U.S. 314, 323 (1996) ("'There is no such thing in the Law, as Writs of Grace and Favour issuing from the Judges.'" (quoting Opinion on the Writ of Habeas Corpus, (1758) 97 Eng. Rep. 29 (H.L.) 36; Wilm. 77, 87 (Wilmot, J.))). Long gone are the "roguish" days when equity varied like the size of the "chancellor's foot," John Selden, The Table Talk of John Selden 61 (Samuel H. Reynolds ed., Oxford, Clarendon Press 1892) (1689). See Lonchar, 517 U.S. at 323 ("'[C]ourts of equity must be governed by rules and precedents no less than the courts of law.'" (quoting Missouri v. Jenkins, 515 U.S. 70, 127 (1995) (Thomas, J., concurring))). To obtain equitable relief, Westerman must point to an established equitable principle. Simply accusing the IRS of acting "inequitabl[y]" is not nearly enough. 

Westerman ignores one of the most fundamental principles of equity: equitas sequiter legem (i.e., equity follows the law). See Magniac v. Thomson, 56 U.S. (15 How.) 281, 299 (1853). Well over a century has passed since American jurisprudence definitively established that "[c]ourts of equity can no more disregard statutory and constitutional requirements and provisions than can courts of law." Hedges v. Dixon Cnty., 150 U.S. 182, 192 (1893). The statutory scheme Congress created in §§ 6672 and 7501 plainly -- and reasonably -- permits the IRS to maximize the treasury's collection of unpaid liabilities by applying undesignated employment tax payments first toward non-trust fund taxes and then by recovering unpaid trust fund taxes from the person (Westerman) responsible for their underpayment. See I.R.C. §§ 6672, 7501. Because the IRS's rights in this case are "clearly defined and established by law, equity has no power to change or unsettle those rights," Magniac, 56 U.S. (15 How.) at 299.
The district court correctly found proper the IRS's allocation of the five WestCorp payments at issue in this case.