USCA1 Opinion

October 30, 1992

UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
_____________________
No. 92-1061
SAMUEL V. SOTIR AND
NORMAN P. JOHNSON,
Plaintiffs, Appellants,
v.
UNITED STATES OF AMERICA,
Defendant, Appellee.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Robert E. Keeton, U.S. District Judge]
___________________
____________________
Before
Torruella, Cyr, and Boudin, Circuit Judges.
______________
____________________

Carl Emmett Baylis was on brief for appellants.

__________________
Christine A. Grant, Attorney, Department of Justice, with w
___________________
A. John Pappalardo, United States Attorney, James A. Bruton, Act
__________________
________________

Assistant

Attorney General,

Gary R. Allen, Attorney, Department

______________
Justice, and Richard Farber, Attorney, Department of Justice, were
______________
brief for appellee.
____________________
____________________

BOUDIN, Circuit Judge.

______________
this

appeal is

whether, when

liabilities sends
but

fails

the

applies,

the IRS may apply

chooses.

In agreement

question presented on

taxpayer with

a payment to the

to specify

and in accord

The sole

several tax

Internal Revenue Service

liability to

which

the payment to

the liability it

with the district court in

with other circuits, we hold

the payment

this case

that the IRS may

make this choice.

Samuel
directors

V. Sotir

and Norman

and shareholders of R

P. Johnson

were officers,

& M Industries,

Inc. ("R &

M"), a Massachusetts

corporation.

The

corporation incurred

two forms of tax liability at issue here.

26 U.S.C.

3102, 3402, the

employees'
federal

wages both

income taxes.

withheld

First, pursuant to

corporation withheld from

social

security

Employers are

its

("FICA") taxes

and

required to hold these

funds "in trust for the United States," 26 U.S.C.

7501(a), and

thus

the taxes

"trust-fund" taxes.

See
___

are sometimes

United States v.
_____________

referred to

as

Energy Resources
________________

Co., Inc., 495 U.S. 545, 546-547 (1990).

_________

Second, FICA being

a tax

employer

imposed

separately

on

both

the

and

the

employee, R & M was liable for its own share of FICA taxes.
The corporation withheld
from the wages of

its employees during the four

1986 and the first two

exception

FICA and federal income

quarters of 1987.

taxes

quarters of

However,

with the

of two small payments made in the second and third

-2-2-

quarters

of 1986, the corporation failed to remit to the IRS

the

withheld

pursuant

amounts as

to

26

required

U.S.C.

by

6672(a),

law.

Consequently,

authorities

assessed

penalties against Sotir and Johnson equal to $146,559.83, the

unpaid

balance

employers fail
6672(a)

of

the

to pay

"the

withheld trust-fund
trust-fund taxes, then

government

can

directly from the officers or

are

responsible for

495 U.S. 545

collect

an

When

under section
equivalent

sum

employees of the employer

who

their collection

Energy Resources Co., 871

_____________________
aff'd sub nom.
_____ ___ ___

taxes.

and payment."

F.2d 223,

225 (1st

In re
_____

Cir. 1989),

United States v. Energy Resources Co., Inc.,

_____________
__________________________
(1990).

Sotir and Johnson

both concede

that

they are such responsible persons.

After

the

Johnson, R & M
drawn

on the

designate

corporate account.

tax liability

own share of the

permitted a

were

made

sent payments to the

whether these

trust-fund
for its

assessments

against

Sotir

and

IRS totaling $57,587.61

The

corporation

payments should
or to the

be applied

did not
to its

corporation's liability

FICA taxes.

"IRS

policy has long

taxpayer who `voluntarily' submits

___________

a payment to

the IRS to designate the tax liability (i.e., `trust fund' or

___
non-trust fund

tax debts) to which the

payment will apply."

In re Energy Resources Co., 871 F.2d at 227.

_________________________
Upon
allocated

receiving

the

$41,492.26 to

undesignated
the trust-fund

payments,
tax portion

the

IRS

of the

-3-3-

corporation's

liabilities

$16,095.35 to

and

the non-trust-fund

allocated

the

remaining

tax liability.

Sotir and

Johnson claimed in the district court that the IRS erred as a

matter of law in failing to apply all of the
corporation's
reduced

trust-fund

their

own

assessments made
rejected

unpersuaded

and so
governing

their

which

liability

under section 6672(a).

with the
by

liability,

personal

their position

inconsistent

tax

attempt

do we.

payments to the
would have

resulting

The district court

Their

position is

general rule,
to

from

avoid

and we

that

rule

are
by

interposing a recent Supreme Court decision.

When
indicating
applied,

taxpayer

makes

the liability
ordinarily

the

to
IRS

voluntary

which
may

the

payment
payment is

apply

the

whichever liability of the taxpayer it chooses.

United States, 961
_____________

F.2d 867,

United States, 808 F.2d 411,

without

878 (9th Cir.

to

be

payment

to

See Davis v.
___ _____

1992); Wood
____

416 (5th Cir. 1987);

v.

Muntwyler

_____________

_________

v. United States,
_____________

703 F.2d 1030, 1032 (7th

also Rev. Rul. 79-284,

____

1979-2 C.B. 83.

approved in several circuits,

Cir. 1983).

This rule has

The rule applied in tax

cases accords with the broader convention that when a

than one debt

party paying

owing to a creditor,

the money may, if

its appropriation; if

been

no contrary authority is cited

to us, and we follow that rule here.

has more

See
___

"the debtor or

he chooses to

he fail, the

debtor

do so, direct

right devolves upon

the

-4-4-

creditor."

National Bank of the Commonwealth v. Mechanics'

__________________________________
_________

National Bank, 94 U.S. 437, 439 (1876).

_____________
In this

case, when

the IRS

received the

tax payments

from R & M without any direction as to their application, the

IRS

applied

portion

liability for FICA

consistent

with

taxes.
its

($16,095.35)

to

To this extent,

ordinary policy

of

R & M's

own

tax

its action

was

first

allocating

undesignated
See
___

payments

to cover

non-trust-fund liabilities.

IRS policy statement P-5-60, May 5, 1984, reprinted in 1

____________

Internal Revenue Manual (CCH), at 1305-14.

"Obviously it is

normally to the IRS's best interest to apply payments to that

part

of the corporate debt that

obligation of

is not secured by the trust

its `responsible' officers.

designed to maximize the public

The IRS policies

fisc by collecting all taxes

due are entitled to great weight."

New Terminal Stevedoring,

_________________________

Inc. v. M/V Belnor, 728 F. Supp. 62, 65 (D. Mass. 1989).

___
__________
Sotir and Johnson, of course, do not object to the IRS's
allocation

of over

trust-fund

tax

two-thirds of

liability,

IRS's ordinary policy

favored their

an apparent

deviation

that is unexplained in the

interests.

error for the IRS

the R & M payment

Rather they

to its
from the

record but

contend that

it was

to apply any portion--here, $16,095.35--of

the payments to the corporation's own tax liability while its

trust-fund tax
Sotir

liability remained

unpaid.

On

this appeal,

and Johnson argue that the general rule giving the IRS

-5-5-

discretion

to

allocate

undesignated

payments

has

been

altered, at least where trust-fund taxes are involved, by the

Supreme

Court's

decision

in

Begier
______

v.

Internal Revenue
_________________

Service, 496 U.S. 53 (1990).

_______
The argument, although inventive,

is without force.

In

Begier, a taxpayer made

______

certain payments of trust-fund taxes

to

both

the

IRS--including

excise

taxes

collected

from

customers and income and FICA taxes withheld from employees-within 90 days before
56.

The

filing a bankruptcy petition.

bankruptcy

those payments to the IRS as a "preference" under 11

U.S.C.

547(b).

by a debtor to

the transfer occurs

files a

for the

That section provides in relevant part

transfer of its property

debtor

to recover

action

estate)

debt, where

is,

an

the

Id.
__

"avoid" (that

filed

against

that a

IRS to

trustee thereafter

Id. at
__

within 90

bankruptcy petition,

trustee in bankruptcy.

pay a prior

days before

is recoverable

the

by the

The reason is to prevent a preference

to the creditor as against other claimants to the estate.

The

Supreme

Bankruptcy Code,

Court

held

the payments

in

Begier
______

that,

could not be

under

the

avoided because

they

were not made from property of the taxpayer, but rather

from

funds held in trust

for the government

pursuant to 26

U.S.C.

7501.

Id. at
__

though the funds had

"trust"

had arisen

67.

The Court

declared that

not been segregated by the

"within the

meaning of

even

taxpayer, a
7501"

at the

-6-6-

moment that
and

the excise

FICA and

Id. at
__

taxes were collected

income taxes

61-62.

withheld from

This alone

from customers

employees' wages.

did not resolve the

case because

the payments themselves could not be traced back under common

law

tracing

taxpayer;

principles
but,

legislative
debtor's
obligation

to

relying

history, the

act
. .

of

any

primarily
Supreme

voluntarily
.

is

required nexus between

funds paid" to the IRS.

particular

alone

on

Court

paying

of

the

Bankruptcy

Code

decided that

"the

its

trust-fund

tax

to

establish

the

held in

trust and

the

sufficient

the `amount'

funds

Id. at 66-67.
__

Sotir and Johnson argue that in this case, as in Begier,

______

the

payments to the IRS by the corporation were derived from

funds held in trust

from

and thus the IRS, without

the corporation,

should have

any direction

applied the

cover the trust-fund tax liabilities.

payments to

Unfortunately for this

argument, the point of departure in Begier was the taxpayer's

______
designation,

by agreement

with

payments in that case would be

fund tax

obligations" of the

substance, Begier
______
the time of
payment
from

the IRS,

that

taxpayer.

Id.
__

In
made at

funds used in

thereby shielding the payments

preferences.

contrast, R & M made

at 56.

to this designation,

payment, in order to classify the

avoidance as

the

allocated to "specific trust-

gave effect

as trust-fund taxes,

all of

In

the

present case,

by

no designation when it made its payment

-7-7-

to the

IRS.

Indeed,

it is

the failure to

do so that

has

landed Sotir and Johnson in their present predicament.

The Supreme Court's analysis in Begier related solely to
______

the

impact

payments

of a

taxpayer

under the

Code, a provision
Begier did not,
______
question

in no

way involved in

either by reasoning

of

the

the present

suggest any intent

case.

or result, address

a designation.

that nowhere

status of

the Bankruptcy

should allocate payments

fails to make

unnecessary to add
Court

preference provision

of how the IRS

taxpayer who

designation upon

in Begier
______

to overturn the

It

the

made by a
is almost

did the

Supreme

line of decisions

allowing the IRS, absent some direction from the taxpayer, to

apply payments to whichever
wishes.

of the taxpayer's liabilities it

That line of decisions disposes of this case.

The judgment of the district court is affirmed.

________

-8-8-