Wednesday, November 7, 2007

Trust fund penalty - Payroll Taxes - Section 6672 joint and several liability

Thomas McLaren and Rita McLaren, Plaintiffs v. IRS Appeals Office and Michael Jeka, Defendants.

U.S. District Court, Dist. Mont., Butte Div.; CV-06-53-BU-RFC, September 28, 2007.

[ Code Secs. 6330 and 6672]

Responsible person: Failure to collect tax: Failure to pay over tax: Trust fund recovery penalty: Joint and several liability. --

A married couple's complaint challenging a Collection Due Process (CDP) hearing determination that they were liable for unpaid employment taxes was dismissed for failure to state a claim upon which relief could be granted. The couple did not contest the assessed trust fund recovery penalty. Instead, they argued that another partner should share responsibility for the taxes owed. However, liability under Code Sec. 6672 is joint and several. Thus, the IRS was not required to seek payment from every possible responsible person but could assess the tax against one responsible person and not another.


CEBULL, United States District Judge: On September 10, 2007, United States Magistrate Judge Carolyn S. Ostby entered her Findings and Recommendation on the United States' Motion to Dismiss. Doc. 16. Although the United States made several arguments for dismissal, Magistrate Judge Ostby recommends the motion be granted for two reasons: (1) pursuant to Local Rule of Procedure 7.1(i) because Plaintiffs failed to respond to the motion to dismiss and such failure to respond is deemed an admission that the motion is well-taken; and (2) pursuant to Fed.R.Civ.P. 12(b)(6) because the Complaint fails to state a claim upon which relief may be granted.

Upon service of a magistrate judge's findings and recommendation, a party has 10 days to file written objections. 28 U.S.C. § 636(b)(1). In this matter, no party filed objections to the Findings and Recommendations. Failure to object to a magistrate judge's findings and recommendation waives all objections to the findings of fact. Turner v. Duncan, 158 F.3d 449, 455 (9th Cir. 1999). However, failure to object does not relieve this Court of its burden to review de novo the magistrate judge's conclusions of law. Barilla v. Ervin, 886 F.2. 1514, 1518 (9th Cir. 1989).

In this case, Magistrate Judge Ostby correctly ruled that Liability under 26 U.S.C § 6672 is joint and several and that the IRS is not required to seek payment from every responsible person and may assess the tax against one responsible person and not another. 14 MERTENS LAW OF FED. INCOME TAX'N § 54;105 (Sept. 2007). for those reasons, this Court finds Magistrate Judge Ostby's Findings and Recommendation are well grounded in law and fact and HEREBY ORDERED they be adopted them in their entirety.

For those reasons, IT IS FURTHER ORDERED that Defendant's Motion to Dismiss ( Doc. 16) is GRANTED .

The Clerk of Court shall notify the parties of the entry of this Order and close this case.


OSTBY, United States Magistrate Judge: Plaintiffs Thomas McLaren ("Mr. McLaren") and Rita McLaren ("Mrs. McLaren") (collectively "the McLarens") initiated this action against Defendants the Internal Revenue Service ("IRS") and IRS appeals officer Michael Jeka (collectively "Defendants") on July 26, 2006. Cmplt. (Court's Doc. No. 1) at 1. The McLarens challenge Defendants' determination of taxes due from Anaconda Ace Hardware LLP, and assessed against Mr. McLaren by the IRS. Id. The McLarens have attached to their Complaint as Exhibit 1 the IRS "Notice of Determination Concerning Collection Action(s) Under Section 6320 and/or 6330" and the IRS "Enclosure to Notice of Determination" addressed to Mr. McLaren. Cmplt. at Ex. 1.

Before the Court is the United States' Motion to Dismiss (Court's Doc. No. 16). Having reviewed the motion, Defendants' brief, and the record, it is recommended that Defendants' motion be granted for the reasons stated herein.


The McLarens allege in their Complaint, in relevant part, as follows:


1. Jenka (sic) of the IRS Appeals office made a determination involving our due taxes from Anaconda Ace Hardware LLP - We believe that we are not responsible for the full amount because of our partnership. Another partner should share in the total amount owed but was dismissed by Mr. Jenka (sic) of responsibility for the taxes.


The relief we seek is that Mr. John Corrigan be added to the owed taxes and that the amount be reduced and/or the penalties reduced so we can afford to make payments or restitution.

Cmplt. at ¶¶III and IV.

On July 16, 2007, Defendants filed their Motion to Dismiss. They advance three primary arguments in support of their motion. Memorandum in Support of United States' Motion to Dismiss ("Defts' Br.") at 1-2.

First, Defendants argue that the Court lacks subject matter jurisdiction over Mrs. McLaren's claims because the outstanding tax liability is Mr. McLaren's. Thus, Defendants argue, Mrs. McLaren lacks standing, the Court lacks subject matter jurisdiction over her claims, and dismissal of her claims is appropriate under Rule 12(b)(1), Fed. R. Civ. P. 1 Id. at 1, 6-7.

Second, Defendants argue that the McLarens failed to serve the United States within 120 days of filing the complaint as required by Rule 4(m). 2 Thus, Defendants argue, dismissal is appropriate under Rule 12(b)(5) for insufficiency of service of process. Id. at 2.

Third, Defendants argue that the McLarens have failed to state a claim upon which relief can be granted. Thus, they argue, Rule 12(b)(6) mandates dismissal. Id. at 1, 8-13. The McLarens failed to respond to Defendants' motion to dismiss.


The Court has considered the record and the arguments presented. Having done so, the Court concludes that the motion to dismiss should be granted for two reasons.

First, under the Local Rules of this Court, the McLarens' failure to respond is a concession that the motion is well-taken. Rule 7.1(i) of the Local Rules of Procedure of the United States District Court for the District of Montana provides that the "[f]ailure to file a brief by the adverse party shall be deemed an admission that the motion is well taken." The McLarens' failure to respond to Defendants' motion indicates that they do not contest the motion and concede that it should be granted.

Second, the Court concludes that the McLarens' Complaint fails to state a claim upon which relief can be granted. Thus, the Court recommends that the Complaint be dismissed under Rule 12(b)(6).

Under Rule 12(b)(6), a reviewing court "`must construe the complaint in the light most favorable to the plaintiff and must accept all well-pleaded factual allegations as true.' " Syverson v. Int'l Bus. Machines Corp., 472 F.3d 1072, 1075 (9th Cir. 2007) (quoting Shwarz v. United States, 234 F.3d 428, 435 (9th Cir. 2000)). Dismissal is proper only when there is no cognizable legal theory or an absence of sufficient facts alleged to support a cognizable legal theory. Balistreri v. Pacifica Police Dep't, 901 F.2d 696, 699 (9th Cir. 1990).

In the case at hand, the IRS assessed Mr. McLaren with taxes under 26 U.S.C. §6672(a). Cmplt. at Ex. 1 (indicating "Tax Type/Form Number" as "IRC [Internal Revenue Code] 6672 / TFRP"); 26 U.S.C. §6672(a). The McLarens do not contest the assessed tax liability. Rather, they claim only that they "are not responsible for the full amount" and urge that "[a]nother partner should share in the total amount owed . . .." Cmplt. at ¶III.

Even if the Court, construing the facts of the Complaint in the light most favorable to the McLarens, determines that another person also may be liable, as the McLarens contend, the McLarens still are unable to prevail with this action under the law.

"Liability under Section 6672 is joint and several." 14 MERTENS LAW OF FED. INCOME TAX'N §54:105 (Sept. 2007) ("MERTENS") (citing Hartman v. U.S., 538 F.2d 1336, 1340 (8th Cir. 1976); see also Schultz v. U.S., 918 F.2d 164, 167 (Fed. Cir. 1990); Brown v. U.S., 591 F.2d 1136, 1142 (5th Cir. 1979); Savage v. U.S., 2006 WL 449117 *2 n.2 (E.D. Cal. 2006) (citing cases). Also, the IRS is not required to seek payment from every responsible person and may assess the tax against one responsible person and not another. 14 MERTENS §54:105 (citing Howard v. U.S., 711 F.2d 729, 735 (5th Cir. 1983)). Thus, even if some other person may share responsibility with Mr. McLaren for the tax that he admits is owed, the IRS has no obligation to pursue that individual and, under Section 6672, is permitted to pursue Mr. McLaren. Thus, he has failed to state a claim herein upon which relief can be granted. This, coupled with the fact that the McLarens did not respond to Defendants' motion to dismiss, convinces the Court that dismissal is appropriate. Because of this conclusion, the Court does not address Defendants' other arguments in support of their motion to dismiss.


Based on the foregoing,

IT IS RECOMMENDED that the United States' Motion to Dismiss (Court's Doc. No. 16) be GRANTED.

NOW, THEREFORE, IT IS ORDERED that the Clerk shall serve a copy of the Findings and Recommendations of the United States Magistrate Judge upon the parties. The parties are advised that pursuant to 28 U.S.C. §636, any objections to these findings must be filed with the Clerk of Court and copies served on opposing counsel within ten (10) days after receipt hereof, or objection is waived.

1 All references to Rules herein are to the Federal Rules of Civil Procedure unless indicated otherwise.

2 Defendants also argue that the United States is the only proper defendant for two reasons. First, they argue, the IRS is an agency of the United States and, as such, it enjoys sovereign immunity. Congress has not waived this immunity. Thus, they argue, the IRS is not an entity subject to suit and the United States is properly substituted in its place.

Second, Defendants argue that Jeka, an IRS Appeals Officer, is sued herein in his official, and not individual, capacity. Thus, Defendants argue, a claim against him is actually a claim against the United States. Consequently, the United States is the only proper defendant in this action. Id. at 3.

Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax: Joint and Several Liability: Joint and several liability

Two corporate officers did not meet their burden of proving that their failure to collect and pay over employment taxes was not willful. Because liability under Code Sec. 6672 is joint and several, one officer's claim that the other officer had been directed to pay the tax but had embezzled the money was without merit. However, one officer was not liable for taxes that had accrued after he left the corporation.

H. Scott, DC Colo., 89-2 USTC ¶9445.

A jury found that both taxpayers, the president and a third party defendant, were responsible for paying over withheld income and social security taxes. Since both taxpayers bore the responsibility of truthfully accounting and paying over such taxes and the taxes were not paid over, the plaintiff-taxpayer was not entitled to recover amounts already paid, his suit was dismissed, and the third party defendant-taxpayer was also liable for an amount equal to taxes not paid over although the Government was limited to only one recovery.

M.B. Bagby, DC, 73-2 USTC ¶9485.

Although a corporation was operated by one of the owners, two other owners were held to be jointly and severally liable for unpaid employment taxes, where the two owners agreed to indemnify the managing owner for any liability arising from the operation of the corporation.

J.L. Barker, DC, 72-1 USTC ¶9225.

If two or more corporate officers have the responsibility and authority to cause the failure to collect and pay over the taxes, the taxpayer need be only one of the responsible persons in order for the government to assess the penalty. Therefore, this fact was not a valid defense where the taxpayer was one of the persons responsible.

J. Labowitz, DC, 73-1 USTC ¶9155, 352 FSupp 202.

F. Rizzo, DC, 73-1 USTC ¶9268.

Deering, DC, 73-1 USTC ¶9462.

A.M. Sinder, CA-6, 81-2 USTC ¶9612.

Similarly, except that a jury found that the taxpayer was not one of the responsible corporate officers.

P. Shinberg, DC, 73-1 USTC ¶9338.

In the following cases, it was held that two or more corporate officers were responsible for the failure to pay over withheld taxes.

M.C. Marker, Sr., DC, 73-2 USTC ¶9688.

J.L. Bernardi, DC, 74-1 USTC ¶9170. Aff'd, CA-7, 75-1 USTC ¶9133, 507 F2d 682. Cert. denied, 422 US 1042.

P. Kynell, DC, 74-1 USTC ¶9261.

J.F. Fortine, Sr., DC, 74-1 USTC ¶9297.

H. Miller, DC, 74-1 USTC ¶9343.

H.D. French, DC, 74-1 USTC ¶9367.

A.M. Pearson, DC, 74-2 USTC ¶9663.

H.E. Harrington, CA-1, 74-2 USTC ¶9772, 504 F2d 1306.

D.V. Adams, DC, 75-1 USTC ¶9104.

L.R. Ernce, DC, 75-1 USTC ¶9284.

S. Filis, DC, 75-1 USTC ¶9436. Aff'd, CA-5, (unpublished opinion 7/2/76).

K.P. Palmer, DC, 75-2 USTC ¶9649.

L. Friedman, DC, 77-1 USTC ¶9288.

V.T. Fletcher, DC, 81-1 USTC ¶9208.

J.E. Ronholt, DC Wash., 84-2 USTC ¶9678.

E.A. Kappas, DC, 83-2 USTC ¶9683, 578 FSupp 1435.

C.A. Rice, DC, 83-2 USTC ¶9717.

C.T. Huggins, DC, 84-1 USTC ¶9192.

M. Schlauch, DC Ohio, 84-1 USTC ¶9431.

R. Cantu, DC Wash., 84-1 USTC ¶9528.

C. Latimer, DC Ill., 84-2 USTC ¶9769, 593 FSupp 881.

E.W. Israel, DC Tex., 88-2 USTC ¶9449.

M.J. McCray, CA-5, 90-2 USTC ¶50,492.

The court granted the government's motion to file an amended answer, counterclaim and third-party complaint. It concluded that the third party might be liable to the government for all or part of the taxpayer's liability for the penalty assessed for unpaid withholding taxes. Thus, the liability of the taxpayer and the third party should be tried together.

W.R. Kasik, DC, 75-2 USTC ¶9525.

The district courts have permitted the government, as part of its counterclaim action for unpaid employment taxes, to join the officer bringing the refund suit and other company officials as third-party defendants.

Crompton-Richmond Co., Inc., Factors, DC, 67-2 USTC ¶9607, 273 FSupp 219.

B.A. Wilkie, DC, 68-1 USTC ¶9227, 279 FSupp 671.

W.R. Kasik, DC, 75-2 USTC ¶9525.

Similarly, even though the government did not join other parties whom the third-party officer defendant contended might be liable for the unpaid taxes.

J.P. Stiber, DC, 73-2 USTC ¶9755, 60 FRD 668.

The court dismissed complaints against fourth-party defendants who had been impleaded by third-party defendants who, the government had claimed in a refund suit, were or could be liable as responsible persons who had failed to pay over withholding tax. The third-party defendants alleged only that the fourth-party defendants might be liable to the government, not that they might be liable to them. Nor does Sec. 6672 provide for any right of contribution among all persons who might be liable for the penalty it imposes.

F.R. DiBenedetto, DC, 75-1 USTC ¶9503.

However, the taxpayer could not obtain, through discovery, certain internal IRS communications, nor could he obtain information from the IRS relating to the solvency of the cross-defendants.

T.P. Garity, DC, 81-2 USTC ¶9599.

A motion to dismiss, made by third-party defendants after the government compromised its claim of a one-hundred-percent penalty against the original plaintiff, was properly denied. It was in reality a motion for summary judgment, and a genuine issue of material fact remained as to whether the third-party defendants were liable as responsible persons for the failure of a corporation to pay over withholding taxes.

P.C. Lemieux, DC Conn., 84-2 USTC ¶9806.

Delinquent taxpayers' admissions to the propriety of 100 percent penalty assessments attributable to the individual failures to pay over withholding taxes effectively constituted an admission of joint and collective liability. Thus, tax liens upon real estate owned by a married couple as tenants by the entirety were valid prerequisites to the subsequent foreclosure action upon their residence. Under state law (Pennsylvania), the individual indebtedness of a husband and wife to a single creditor permits the treatment of the liability as joint liability for the purpose of attaching and foreclosing upon entireties property.

J.A. Eglinton, Jr., DC Pa., 90-1 USTC ¶50,322.

One of the taxpayer's claims that the IRS had entered into preferential settlements with the other taxpayers was dismissed since the IRS has the right to choose the taxpayers from whom the 100-percent penalty may be collected.

B.R. Neier, DC Kan., 91-1 USTC ¶50,234.

No right to indemnification or contribution existed for a taxpayer against whom the 100% penalty was sought for failure to collect and pay over tax or attempt to evade or defeat tax. Therefore, summary judgment was granted for the individual against whom the claim for indemnification was filed. The court determined that no statutory right to contribution exists under Code Sec. 6672. Further, the court rejected a decision from another federal district that an action for contribution or indemnity may be brought after the collection action is completed. That decision was based on the reasoning that the intent of Code Sec. 6672 is to ensure collection of tax. The court, however, stated that the intent of Code Sec. 6672 is to punish the taxpayer. Regardless, the indemnity action was brought before the collection action was completed. Also, because the allegation was not supported by affidavit, the court rejected the contention that another individual had agreed to pay the penalty with a pending loan.

D.W. Conley, DC Ind., 91-2 USTC ¶50,431, 773 FSupp 1176.

Principals of a corporation had no federal common law or statutory right of action for contribution or indemnity against others who also might be liable for penalties arising from their failure to collect, account for, and pay over the corporation's employment taxes. Further, an agreement releasing the principals from liability claims against the defunct corporation did not protect them from the penalty assessment. The penalty assessment was aimed at the personal liability of all individuals connected with the corporation who were responsible for collecting, accounting for, and paying over the corporation's employment taxes. To have allowed principals to recover from other responsible persons would have hindered the deterrent purpose of the statute.

T.A. Amerson, DC Mo., 92-2 USTC ¶50,460.

A motion to join a third person, who was not a responsible person, in order to seek contribution from him which was made by an alleged responsible person for failure to pay over withheld taxes was denied for lack of subject matter jurisdiction. No statutory right to contribution existed under Code Sec. 6672 and the claim would only frustrate Congress's goal of efficient tax collection proceedings. An alternative claim seeking joinder on the ground that the claim arose out of the same transaction due to a transfer of funds to the third party with the intention that the latter pay the disputed tax was rejected because it occurred in a later year.

J. Ringer, DC Tex., 94-2 USTC ¶50,585.

Although an officer left a corporation and entered into a settlement agreement with other shareholders in which those shareholders or the corporation would pay delinquent taxes, the agreement did not limit his personal liability. In addition, an installment agreement executed by the corporation with the IRS did not supplant the personal liability of the officer.

J.C. Lynch, BC-DC Ala., 95-2 USTC ¶50,410.

The taxpayers' burden of proving either that they were not responsible persons or that failure to pay the tax was not willful was not met by proof that another, such as the corporate employer, was in a position to pay the taxes.

W.C. Farrington, DC N.H., 96-1 USTC ¶50,094.

A corporate president qualified as a responsible person who acted willfully with respect to the entity's payroll tax delinquencies. His allegation that the IRS selectively enforced the trust fund recovery penalty by targeting him for prosecution despite the existence of other responsible persons was insufficient to warrant the dismissal of the case. The IRS, which presented credible evidence regarding his liability, was not required to prosecute all potential responsible persons.

W.W. Borland II, DC Mich., 2000-1 USTC ¶50,458. Aff'd, CA-6 (unpublished opinion), 2001-2 USTC ¶50,767.

A corporate treasurer's liability for the trust fund recovery penalty was not negated by the fact that there may be other individuals equally liable. The treasurer's was jointly and severally liable for the entire amount of the penalty.

J.A.P. Leiter, DC Kan., 2004-1 USTC ¶50,162.

The government was able to jointly recover the balance of unpaid employment taxes from the chairman of the board of a parochial school. As chairman, he had enough responsibility to be personally liable, he knew about the tax burden, and he signed several checks to some of the school's creditors instead of paying withheld taxes.

M.E. Holmes, DC Tex., 2004-2 USTC ¶50,301.

A company president, who was held liable for the trust fund recovery penalty at the summary judgment phase of a case, was relieved of liability for the IRS Certified Assessment amounts following the trial of the two other company officers for the same trust fund taxes. While, at the summary judgment phase, the president failed to carry his burden of proving the assessments against him were erroneous, the jury in the trial phase held that the assessments against the other officers were excessive and erroneous and determined that the actual assessment amounts were substantially less than the amounts determined by the IRS. An inherent unfairness to the president would result, considering the joint and several nature of the trust fund recovery penalty, if he were unable to obtain relief.

D.R. Ferguson, DC Iowa, 2005-1 USTC ¶50,119, 343 FSupp2d 787.

Failure to Collect and Pay Over Tax, or Attempt to Evade or Defeat Tax: Partners and partnerships

An agreement between one partner (who received all of the partnership assets upon dissolution of the partnership and assumed all of the partnership liabilities) and the IRS for installment payments of unpaid employment taxes of a dissolved partnership did not discharge the other partner from liability for such taxes under the Colorado partnership statute. The act of forbearance by the IRS concerning collection was not a material alteration in the nature or timing of the underlying overdue obligation. Moreover, the IRS reserved its rights against the other partner.

J.R. Hays, CA-10, 89-2 USTC ¶9570.

According to the lower court, subsequently reversed, a general partnership and the individual who executed a limited partnership agreement on behalf of the general partnership were not entitled to a refund of employment taxes, penalties, and interest. Under state (California) law, the general partnership was treated as a general partner because the taxpayers neither recorded a Certificate of Limited Partnership nor substantially complied in good faith with California law. The IRS could not have had clear notice of the partnership arrangements because the certificate was not recorded until two years after it was executed. The IRS was not required to rely on the taxpayer's failure to record in order to recover on the basis of general partnership liability.

Gamma Farms, DC Calif., 90-2 USTC ¶50,378. Rev'd and rem'd, CA-9 (unpublished opinion 3/9/92).

A partnership that handled the payroll functions of another company was a "responsible person" for purposes of the 100% penalty for willfully failing in its duty to withhold and pay social security and income taxes owed by the company. The partnership had the ultimate authority for the decision not to pay the taxes. Further, the partnership acted on its own behalf in its dealings related to the company that owed the taxes. As a result, a general partner who owned 30.85% of the partnership was liable for her share of the tax liability assessed against the partnership, despite the fact that she was a silent partner with no managerial responsibility or involvement in the partnership. Because this was a bankruptcy action, the IRS bore the burden of proving its tax claim against the general partner.

J. Elms, BC-DC La., 93-1 USTC ¶50,284.

An individual was jointly and severally liable, pursuant to state (New York) law, for tax liabilities attributable to a partnership's failure to remit withheld payroll taxes. Although the individual asserted that he never had any association with, or knowledge of, the partnership, he entered into an agreement with the other two partners, was identified by one of the other partners as a co-partner, and was identified in the partnership's federal return, by name and social security number, as a partner.

M. Carlin, DC N.Y., 97-1 USTC ¶50,302.

The general partner in a law firm was personally liable for the partnership's employment tax deficiency. State (Texas) law, which made individual partners personally liable for the partnership's debts, was not preempted by the trust fund recovery penalty rules under Code Sec. 6672 because those provisions did not provide an exclusive remedy against members of a partnership and were not intended by Congress to preempt state partnership law.

W.P. Remington, CA-5, 2000-1 USTC ¶50,369, 210 F3d 281. Aff'g DC Tex., 98-2 USTC ¶50,739.

The partner of a responsible person was jointly and severally liable for trust fund taxes. Because the taxes were a debt of the partnership and the taxpayer was a partner in the business, she was jointly and severally liable for the tax, whether or not she was a responsible person under Code Sec. 6672. Code Sec. 6672 does not set the exclusive standard for establishing individual liability of partners; it is intended to be used with Code Sec. 3403 and state law.

C.B. Mira, BC-DC Pa., 99-2 USTC ¶50,760.

The general partner of a theatrical production was properly found liable under state (New York) law for the partnership's unpaid withholding tax liabilities. The taxpayer's contention that she was not a partner and that Code Sec. 6672 was the appropriate body of law under which the government was required to proceed were rejected. A prior suit she instituted against an advertising agency for copyright violations rested on her status as a partner; thus, she was judicially estopped from asserting otherwise in the instant litigation. Consequently, the IRS was permitted to seek relief either under Code Sec. 6672 or pursuant to state partnership law.

West Productions, Ltd., DC N.Y., 2001-1 USTC ¶50,358.

The general partner of a partnership was not entitled to a refund of trust fund recovery penalties imposed in connection with the partnership's unpaid employment taxes. He signed a partnership agreement, shared in the profits of the partnership, held a right to control the business and never filed a certificate of limited partnership. The taxpayer remained liable under Code Sec. 6702 because the tax liability existed on the date of the partnership's dissolution.

J.P. Helland, FedCl (unpublished opinion), 2002-2 USTC ¶50,754

Alvin S. Brown, Esq.
Tax Attorney

703 25-1400

To provide IRS transparency, upload your IRS experiences to

No comments: