Gary Westerman v. United States

United States Court of Appeals
For the Eighth Circuit
___________________________
No. 12-1943
___________________________
Gary Westerman, also known as G. Westerman
lllllllllllllllllllll Plaintiff - Appellant
v.
United States of America
lllllllllllllllllllll Defendant - Appellee
____________
Appeal from United States District Court
for the Western District of Arkansas - Hot Springs
____________
Submitted: January 15, 2013
Filed: June 27, 2013
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Before RILEY, Chief Judge, WOLLMAN and GRUENDER, Circuit Judges.
____________
RILEY, Chief Judge.
Gary Westerman, as president and owner of WestCorp, Inc., presided over the
financial collapse of S&S Office World (S&S), WestCorp’s office supply store in Hot
Springs, Arkansas. S&S could not compete when Office Depot moved into town. As
WestCorp’s losses mounted in 2000 and 2001, the company continued to pay
employees and creditors, but underpaid the Internal Revenue Service (IRS). Unable
to recover from the now defunct WestCorp, the IRS assessed a penalty under
26 U.S.C. (I.R.C.) § 6672 against Westerman, the person responsible for collecting
and paying the “trust fund” portion (i.e., the amount withheld from employees’
paychecks) of WestCorp’s federal employment taxes.
Although Westerman has paid the full $35,824.45 penalty, he accepts
responsibility only for $28,955.15 of the unpaid taxes. He pursued an administrative
claim, which the IRS denied, and then sued the government for a refund in district
court. His dispute with the IRS centers on its treatment of admittedly incomplete
payments WestCorp made from 2000 to 2001. To maximize its recovery, the IRS
applied those payments first toward WestCorp’s non-trust fund (i.e., employer
matching contribution) taxes rather than dividing the payments proportionally
between WestCorp’s trust fund and non-trust fund taxes. Westerman argued (1) he
did not willfully fail to ensure WestCorp paid the trust fund taxes, and (2) the IRS
should have applied the 2000 and 2001 underpayments proportionally to the trust
fund and non-trust fund taxes. The district court1 disagreed and granted summary
judgment in favor of the government. Westerman appeals, and we affirm.
I. BACKGROUND
A. Facts
Until S&S ceased operations in 2002, Westerman was responsible for
withholding and paying federal employment taxes for S&S. In the first quarter of
2000, Westerman discovered that WestCorp had run out of cash to pay the IRS, and
Westerman skipped his March 2000 tax payment. WestCorp’s financial problems
continued throughout 2000 and 2001, and the company fell behind in its payments
to suppliers and creditors. Although WestCorp continued to pay employees,
suppliers, and creditors—sometimes late—the company never caught up on its IRS
payments. WestCorp did not fully pay its employment taxes in the first and fourth
1
The Honorable Robert T. Dawson, United States District Judge for the
Western District of Arkansas.
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quarters of 2000 or the first, third, and fourth quarters of 2001. During those quarters,
WestCorp made only the following five payments:
1. $5,508.14 on February 24, 2000. WestCorp’s Form 941 for the
first quarter of 2000 listed a monthly tax liability of $5,508.14 for
January 2000.
2. $4,704.94 on April 3, 2000. WestCorp’s Form 941 for the first
quarter of 2000 listed a monthly tax liability of $4,704.94 for
February 2000.
3. $5,166.88 on December 11, 2000, which Westerman says was
intended to satisfy WestCorp’s November 2000 tax liabilities.
WestCorp’s Form 941 for the fourth quarter of 2000 listed tax
liabilities of $5,166.88 for October 2000, and either $4,839.68 or
$4,872.29 for November 2000.2
4. $5,811.66 on April 19, 2001. WestCorp’s Form 941 for the first
quarter of 2001 listed a tax liability of $5,811.66 for March 2001.
5. $1,165.95 on December 27, 2001, which approximately equaled
WestCorp’s total employment tax liability for the month of
November 2001. The record does not contain a Form 941 for the
fourth quarter of 2001. Westerman avers that a copy of this form
is not available from the IRS and neither he nor WestCorp has a
copy of that quarter’s Form 941. Westerman admits all of
WestCorp’s records were destroyed approximately a year and a
half before he brought this case. The government agrees
WestCorp’s tax liability for November 2001 was $1,165.92.3
2
The record contains two Forms 941, both signed and dated December 31,
2000, but it is unclear which version was actually filed with the IRS. Neither one was
actually filed until March 19, 2002.
3
Both parties apparently agree WestCorp’s December 2001 payment was three
cents greater than its November 2001 employment tax liability.
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Westerman avers that he and WestCorp intended each of those payments to cover the
full employment tax liability—both trust fund and non-trust fund—for particular
months within the corresponding quarters.
But when Westerman made these five payments on WestCorp’s behalf, he did
not specifically instruct the IRS—whether by writing on the check, the payment
coupon accompanying the check, or in a contemporaneous letter—to apply the
payments in any particular manner. In accordance with its longstanding practice, the
IRS applied those payments first toward Westerman’s non-trust fund tax obligations
for the quarter in which the payments were made. By doing so, the IRS increased its
potential tax recovery, because WestCorp’s trust fund taxes—unlike its non-trust fund
taxes—were recoverable from Westerman personally if he willfully failed to ensure
their payment. See I.R.C. § 6672.4 Westerman admits that after learning the IRS
applied WestCorp’s payments to the non-trust fund liability—meaning WestCorp’s
proportional trust fund liabilities for the months at issue were not paid—“he
authorized payment of obligations of WestCorp, Inc., other than the subject federal
employment tax obligations for the quarters at issue.”
On March 25, 2004, the IRS assessed a personal penalty of $35,824.45 against
Westerman under I.R.C. § 6672. Having allocated WestCorp’s payments first to the
non-trust fund portion—for which Westerman was not personally liable—the IRS
4
I.R.C. § 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.
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held Westerman personally liable under I.R.C. § 6672 for the unpaid trust fund
portion of WestCorp’s tax liabilities. Westerman paid the assessment in full.
B. Procedural History
On January 25, 2008, Westerman filed a timely administrative claim for refund,
asserting for the first time that the IRS should have applied the five payments to
WestCorp’s liability for particular months rather than quarters. On August 13, 2008,
the IRS denied Westerman’s refund claim. On March 2, 2009, after Westerman
administratively appealed, the IRS Appeals Office sustained the denial of his claim
for refund.
On July 19, 2010, Westerman filed a complaint under I.R.C. § 7422 in the
Western District of Arkansas, seeking a refund of $7,122.31 (i.e., $2,115.27 for Q1
2000, $3,115.44 for Q4 2000, $852.39 for Q1 2001, and $1,039.21 for Q4 2001).
Westerman later reduced his refund request to $6,869.30. Westerman asserted (1) he
did not willfully fail to pay WestCorp’s trust fund liabilities for the five months
WestCorp made payments, and (2) WestCorp’s five payments were effectively,
though not expressly, designated to pay the employment taxes for the months to
which their amounts corresponded. The government moved for summary judgment,
which the district court granted. The district court found “Westerman acted willfully
when he made payments to creditors without first fulfilling his liability for payroll
taxes due and owing to the United States.” The district court also found Westerman
had “failed to designate” the payments, and “[i]n the absence of a specific
designation, the IRS is entitled to apply deposits and payments as it determines them
to be in the best interest of the IRS, in order to collect the taxes that will be hardest
to recover, even if it results in an increased tax liability.” Westerman moved for
reconsideration, which the district court denied. Westerman appeals.5
5
We have appellate jurisdiction under 28 U.S.C. § 1291.
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II. DISCUSSION
Although a tax case, this appeal arises from a district court’s grant of summary
judgment. We review the district court’s order under the familiar de novo standard
of review applicable to summary judgment in any non-tax case. See, e.g., Colosimo
v. United States, 630 F.3d 749, 752 (8th Cir. 2011). Our de novo review leads us to
agree with the district court’s analysis. First, as a matter of law, the undisputed facts
establish that Westerman willfully failed to pay the ratable trust fund portion of
WestCorp’s five payments because he admittedly paid private creditors rather than
the IRS after learning that the trust fund taxes at issue in this case were unpaid.
Second, the undisputed facts establish that Westerman failed to designate in writing
how the IRS should apply the five payments at issue in this case, and the IRS was
well within its statutory and common-law rights to apply the payments in the
treasury’s best interest.
A. Willfulness Under I.R.C. § 6672
Although the government’s hesitation at oral argument gave us pause, we agree
with the district court that the undisputed facts show, as a matter of law, Westerman
willfully failed to pay the trust fund taxes at issue in this appeal.
1. Willfulness Standard
Congress requires employers to withhold from their employees’ paychecks
three federal taxes: income, Social Security, and Medicare. See I.R.C. §§ 3101,
3102(a), 3402(a)(1), 3403. The money thus withheld becomes the “trust fund”
portion of federal employment taxes because the employer holds the money in “trust”
for the federal government until paying it to the IRS. I.R.C. § 7501; see, e.g.,
Anuforo v. Comm’r, 614 F.3d 799, 802 n.2 (8th Cir. 2010). By contrast, employment
excise taxes—Social Security and Medicare matching contributions—constitute the
“non-trust fund” portion of federal employment taxes because the employer pays
them directly, never holding them in “trust.” See I.R.C. §§ 3111, 7501; see also
Diamond Plating Co. v. United States, 390 F.3d 1035, 1038 (7th Cir. 2004). Under
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I.R.C. § 6672, the individual responsible for “collect[ing] such tax, or truthfully
account[ing] for and pay[ing] over” the trust fund portion of federal employment
taxes may be personally liable to the IRS for a “willful[]” underpayment of the trust
fund portion. I.R.C. § 6672. Personal liability does not attach to an employer’s
underpayment of the non-trust fund portion. See id.
Personal liability under I.R.C. § 6672 arises for underpaid trust fund taxes only
under two conditions: first, “an individual must be a responsible person” and, second,
the individual “must willfully fail to pay over the taxes in question.” Ferguson v.
United States, 484 F.3d 1068, 1072-73 (8th Cir. 2007). Westerman admits the first
prong—he was a responsible person. But he disputes the second prong insofar as
WestCorp made some monthly payments. Our court’s standard for willfulness in the
context of § 6672 is well established:
A responsible person acts willfully if he acts or fails to act consciously
and voluntarily and with knowledge or intent that as a result of his action
or inaction trust funds belonging to the government will not be paid over
but will be used for other purposes, or by proceeding with a reckless
disregard of a known or obvious risk that trust funds may not be
remitted to the government.
Keller v. United States, 46 F.3d 851, 854 (8th Cir. 1995) (emphasis added) (internal
quotations omitted).
To the extent Westerman, as the responsible person, made five payments from
WestCorp to the IRS and reasonably expected those payments to satisfy in full
WestCorp’s monthly employment tax liability, the IRS cannot hold him personally
liable for the ratable non-trust fund portion of those five payments unless (1) he
received notice that the trust fund liabilities remained unpaid, and (2) he paid other
creditors instead of the IRS. See, e.g., Oppliger v. United States, 637 F.3d 889, 893-
95 (8th Cir. 2011); cf. Slodov v. United States, 436 U.S. 238, 254 (1978) (“The fact
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that [I.R.C. § 6672] imposes a ‘penalty’ and is violated only by a ‘willful failure’ is
itself strong evidence that it was not intended to impose liability without personal
fault.”).
2. Undisputed Facts Establish Willfulness
The IRS does not dispute Westerman’s claim that at the time he made the
payments he lacked “knowledge or intent” that WestCorp’s payments would not
satisfy the trust fund obligations for the months in which he made the payments. But
the undisputed facts show that after receiving notice WestCorp’s trust fund liabilities
remained unpaid, Westerman made payments—totaling far more than WestCorp’s
unpaid trust fund liabilities—to suppliers and creditors. For this reason,
Westerman’s non-payment was “willful” under I.R.C. § 6672. See, e.g., Elmore v.
United States, 843 F.2d 1128, 1132 (8th Cir. 1988) (“The term willfully does not
connote a bad or evil motive, but rather means a voluntary, conscious, and intentional
act, such as the payment of other creditors in preference to the United States.”
(emphasis added)).6
Whether WestCorp simply “didn’t have the cash” to pay the IRS at the time the
trust fund taxes were due, as Westerman claims, does not matter in this case because
Westerman was a “responsible person[] during each of the quarters in which
[WestCorp] failed to pay the employment taxes.”7 Oppliger, 637 F.3d at 894. What
6
We note § 6672 may use the term “willful” in a most particularized way.
Section 6672’s “notion of ‘fault’ may have little to do with other sections of the Tax
Code,” Slodov, 436 U.S. at 261 (Rehnquist, J., concurring) (emphasis omitted), much
less with other volumes of the United States Code.
7
For this reason, holding Westerman liable is entirely consistent with the
Slodov court’s holding “that the responsible person . . . does not violate § 6672 by
willfully using employer funds for purposes other than satisfaction of the trust fund
tax claims of the United States when at the time he assumed control there were no
funds with which to satisfy the tax obligation and the funds thereafter generated are
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matters here is that while Westerman remained the responsible person, WestCorp
later acquired sufficient, unencumbered funds to satisfy the trust fund liability.8
Under § 6672, “‘individuals who are responsible persons both before and after the
withholding tax liability accrues[,] . . . [have] a duty to use unencumbered funds
acquired after the withholding obligation becomes payable to satisfy that obligation.’”
Olsen v. United States, 952 F.2d 236, 240 (8th Cir. 1991) (quoting Mazo v. United
States, 591 F.2d 1151, 1157 (5th Cir. 1979)); see also Keller, 46 F.3d at 854-55(“Reckless conduct includes a failure to investigate or to correct mismanagement after
having notice that withholding taxes have not been remitted to the Government.”
(internal quotation omitted)).
Instead of satisfying WestCorp’s debt to the government, Westerman used
later-acquired funds to pay suppliers, including S.P. Richards, and to make monthly
payments to the Arkansas Diamond Bank totaling more than WestCorp’s unpaid trust
fund liabilities. This “willful[] fail[ure] to pay the trust fund taxes” exposes
Westerman to liability under § 6672. Oppliger, 637 F.3d at 893; see also Anuforo,
614 F.3d at 806 (holding a responsible person’s “conduct was willful as a matter of
law” because he “continued to make payments to other creditors” despite having
“knowledge of his outstanding trust-fund employment tax debts”).
not directly traceable to collected taxes referred to by that statute.” Slodov, 436 U.S.
at 259-60 (emphasis added). In Slodov, the government sought to hold an individual
liable for unpaid trust fund liability incurred by a company before he became
responsible for ensuring the company’s trust fund payments—the newly responsible
person in Slodov had no control over the company’s prior failure to pay the
government. See id. at 240-42. In Westerman’s case, by contrast, there was no
intervening change in WestCorp’s control, and Westerman himself made the decision
not to pay the IRS.
8
Westerman has not argued the funds WestCorp acquired after he received
notice were encumbered or insufficient to satisfy WestCorp’s trust fund liability. Nor
could he—WestCorp’s subsequent payments to the Arkansas Diamond Bank alone
exceeded WestCorp’s unpaid IRS trust fund liabilities.
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The district court correctly analyzed the undisputed facts under I.R.C. § 6672
and the case law interpreting that section.
B. Payment Allocation
We also agree with the district court that the IRS properly allocated the five
payments at issue in this appeal.
1. IRS’s Right to Allocate Undesignated Payments
When employers make payments toward their quarterly employment tax
liabilities, the IRS’s longstanding practice—absent directions from the employer—is
to 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.9 The IRS’s right to do so springs from a long-established common-law
rule: “Where a debtor owes money to his creditor upon several accounts, he may pay
part, and apply it to any debt; but . . . where it appears that money is paid indefinitely,
the creditor has election to declare on what account he received it.” Anonymous,
(1724) 88 Eng. Rep. 169 (K.B.) 169; 8 Mod. 236, 236 (emphasis added). Since the
earliest days of the American republic, our courts have followed this rule. See, e.g.,
United States v. Kirkpatrick, 22 U.S. 720, 737-38 (1824) (Story, J.) (“The general
doctrine is, that the debtor has a right, if he pleases, to make the appropriation of
payments; if he omits it, the creditor may make it; if both omit it, the law will apply
the payments, according to its own notions of justice.”); United States v. January, 11
9
See, e.g., In re Jehan-Das, Inc., 925 F.2d 237, 238 (8th Cir. 1991) (“Typically,
the IRS applies involuntary payments to nontrust taxes first.”); In re Energy Res. Co.,
871 F.2d 223, 227 (1st Cir. 1989); Liddon v. United States, 448 F.2d 509, 513 (5th
Cir. 1971); Datlof v. United States, 370 F.2d 655, 657-58 (3d Cir. 1966); IRS Policy
Statement P-5-14, reprinted in Internal Revenue Manual (I.R.M.) § 1.2.14.1.3 (“Any
payment made on the business account is deemed to represent payment of the
nontrust fund portion of the tax liability (e.g., employer’s share of FICA) unless
designated otherwise by the taxpayer.”).
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U.S. (7 Cranch) 572, 574-75 (1813) (“The law, with respect to the application of
particular payments when the debtor owes distinct debts, has long since been
settled. . . . If [the debtor] neglects to make the application, the creditor may make it.”
(emphasis added)). Seeing no reason today to abandon a rule which has stood the test
of time, we join our sister circuits in expressly holding the IRS may allocate an
undesignated payment among the payer’s various tax liabilities as the IRS sees fit.10
See, e.g., United States v. Schroeder, 900 F.2d 1144, 1149 (7th Cir. 1990).
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.
10
Consistent with common-law principles, we previously held “the IRS was
entitled to apply [undesignated] payments to the [taxpayer’s] oldest debts first.”
Emshwiller v. United States, 565 F.2d 1042, 1046 (8th Cir. 1977) (emphasis added).
If neither debtor nor creditor designated a payment, common-law courts would “place
it to pay off the old debt first.” Dawe v. Holdsworth, (1791) 170 Eng. Rep. 89 (N.P.)
90; Peake 89, 91 (emphasis added). But common-law courts would make this
allocation only if the creditor failed to apply the undesignated payment “at any time
before [legal] action.” Mills v. Fowkes, (1839) 132 Eng. Rep. 1174 (Ct. Com. Pl.)
1177; 5 Bing. N.C. 455, 462; see also Alexandria v. Patten, 8 U.S. 317, 320 (1808)
(Marshall, C.J.) (“No principle is recollected which obliges the creditor to make th[e]
election immediately.”). Having allocated WestCorp’s undesignated payments upon
receipt, the IRS in this case is not required to apply the payments to WestCorp’s
“oldest debts first,” Emshwiller, 565 F.2d at 1046.
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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.12 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
11
Even if the checks contained a notation, that notation could not reasonably
designate the payment because the IRS likely would never receive the notation. See,
e.g., Wood v. United States, 808 F.2d 411, 416-17 (5th Cir. 1987).
12
In accordance with the quarter designation on the coupons, the IRS applied
the payments toward the unpaid liabilities for the quarter designated on the coupon.
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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.13
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.14
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
13
As previously noted, the record does not contain WestCorp’s Form 941 for
the fourth quarter of 2001.
14
The record shows Westerman deposited one payment—late—after filing the
Form 941 for the corresponding quarter. By contrast, Westerman did not file the
Form 941 for the fourth quarter of 2000 until March 19, 2002—more than two years
after it was due.
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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.15
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.”
15
For the text of I.R.C. § 6672(a), see supra note 4. I.R.C. § 7501(a) provides:
Whenever any person is required to collect or withhold any internal
revenue tax from any other person and to pay over such tax to the United
States, the amount of tax so collected or withheld shall be held to be a
special fund in trust for the United States. The amount of such fund shall
be assessed, collected, and paid in the same manner and subject to the
same provisions and limitations (including penalties) as are applicable
with respect to the taxes from which such fund arose.
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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
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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.
III. CONCLUSION
We affirm the district court’s judgment.
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