
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  whom            ___________________        A. John Pappalardo,  United States  Attorney, James A.  Bruton, Acting        __________________                            ________________        Assistant  Attorney General,  Gary R.  Allen, Attorney,  Department of                                      ______________        Justice, and Richard Farber, Attorney,  Department of Justice, were on                     ______________        brief for appellee.                                 ____________________                                 ____________________                 BOUDIN, Circuit  Judge.  The sole  question presented on                         ______________            this  appeal is  whether, when  a  taxpayer with  several tax            liabilities sends  a payment to the  Internal Revenue Service            but  fails  to specify  the  liability to  which  the payment            applies,  the IRS may apply  the payment to  the liability it            chooses.  In agreement  with the district court in  this case            and in accord  with other circuits, we hold  that the IRS may            make this choice.                 Samuel  V. Sotir  and Norman  P. Johnson  were officers,            directors  and shareholders of R  & M Industries,  Inc. ("R &            M"), a Massachusetts  corporation.  The  corporation incurred            two forms of tax liability at issue here.  First, pursuant to            26 U.S.C.     3102, 3402, the  corporation withheld from  its            employees'  wages both  social  security  ("FICA") taxes  and            federal  income taxes.  Employers are  required to hold these            withheld  funds "in trust for the United States," 26 U.S.C.              7501(a), and  thus  the taxes  are sometimes  referred to  as            "trust-fund" taxes.   See  United States v.  Energy Resources                                  ___  _____________     ________________            Co.,  Inc., 495 U.S. 545, 546-547 (1990).  Second, FICA being            _________            a tax  imposed  separately  on  both  the  employer  and  the            employee, R & M was liable for its own share of FICA taxes.                 The corporation withheld  FICA and federal income  taxes            from the wages of  its employees during the four  quarters of            1986 and the first two  quarters of 1987.  However,  with the            exception  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  amounts as  required  by  law.   Consequently,            pursuant  to  26  U.S.C.     6672(a),  authorities   assessed            penalties against Sotir and Johnson equal to $146,559.83, the            unpaid  balance  of  the  withheld trust-fund  taxes.    When            employers fail  to pay  trust-fund taxes, then  under section            6672(a)  "the  government  can   collect  an  equivalent  sum            directly from the officers or  employees of the employer  who            are  responsible for  their collection  and payment."   In re                                                                    _____            Energy  Resources  Co., 871  F.2d 223,  225 (1st  Cir. 1989),            _____________________            aff'd sub nom.  United States v. Energy Resources  Co., Inc.,            _____ ___ ___   _____________    __________________________            495 U.S. 545  (1990).   Sotir and Johnson  both concede  that            they are such responsible persons.                 After  the  assessments  were  made  against  Sotir  and            Johnson, R & M  sent payments to the  IRS totaling $57,587.61            drawn  on the  corporate account.   The  corporation  did not            designate  whether these  payments should  be applied  to its            trust-fund  tax liability  or to the  corporation's liability            for its  own share of the  FICA taxes.  "IRS  policy has long            permitted a  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  receiving  the   undesignated  payments,  the  IRS            allocated  $41,492.26 to  the trust-fund  tax portion  of the                                         -3-                                         -3-            corporation's   liabilities   and  allocated   the  remaining            $16,095.35 to  the non-trust-fund  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  payments to the            corporation's  trust-fund  tax  liability,  which  would have            reduced   their  own   personal   liability  resulting   from            assessments made  under section 6672(a).   The district court            rejected  their position  and so  do we.   Their  position is            inconsistent  with the  governing  general rule,  and we  are            unpersuaded  by   their  attempt   to  avoid  that   rule  by            interposing a recent Supreme Court decision.                 When  a  taxpayer  makes  a  voluntary  payment  without            indicating  the liability  to  which  the  payment is  to  be            applied,  ordinarily  the  IRS   may  apply  the  payment  to            whichever liability of the taxpayer it chooses.  See Davis v.                                                             ___ _____            United States, 961  F.2d 867,  878 (9th Cir.  1992); Wood  v.            _____________                                        ____            United States, 808 F.2d 411,  416 (5th Cir. 1987);  Muntwyler            _____________                                       _________            v. United States,  703 F.2d 1030, 1032 (7th  Cir. 1983).  See               _____________                                          ___            also Rev. Rul. 79-284,  1979-2 C.B. 83.   This rule has  been            ____            approved in several circuits,  no contrary authority is cited            to us, and we follow that rule here.  The rule applied in tax            cases accords with the broader convention that when a  debtor            has more  than one debt  owing to a creditor,  "the debtor or            party paying  the money may, if  he chooses to  do so, direct            its appropriation; if  he fail, the  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  a  portion  ($16,095.35)  to  R & M's  own  tax            liability for FICA  taxes.   To this extent,  its action  was            consistent  with  its  ordinary policy  of  first  allocating            undesignated  payments  to cover  non-trust-fund liabilities.            See  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  is not secured by the trust            obligation of  its `responsible' officers.   The IRS policies            designed to maximize the public  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  two-thirds of  the R & M payment  to its            trust-fund  tax  liability,  an apparent  deviation  from the            IRS's ordinary policy  that is unexplained in the  record but            favored their  interests.   Rather they  contend that  it was            error for the IRS  to apply any portion--here, $16,095.35--of            the payments to the corporation's own tax liability while its            trust-fund tax  liability remained  unpaid.  On  this appeal,            Sotir  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  the  IRS--including  both  excise  taxes  collected  from            customers and income and FICA taxes withheld from employees--            within 90 days before  filing a bankruptcy petition.   Id. at                                                                   __            56.    The  bankruptcy  trustee thereafter  filed  an  action            against  the  IRS to  "avoid" (that  is,  to recover  for the            estate)  those payments to the IRS as a "preference" under 11            U.S.C.   547(b).  Id.  That section provides in relevant part                              __            that a  transfer of its property  by a debtor to  pay a prior            debt, where  the transfer occurs  within 90  days before  the            debtor  files a  bankruptcy petition,  is recoverable  by the            trustee in bankruptcy.  The reason is to prevent a preference            to the creditor as against other claimants to the estate.                 The  Supreme  Court  held  in  Begier  that,  under  the                                                ______            Bankruptcy Code,  the payments  could not be  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  67.   The Court  declared that  even                             __            though the funds had  not been segregated by the  taxpayer, a            "trust"  had arisen  "within the  meaning of    7501"  at the                                         -6-                                         -6-            moment that  the excise  taxes were collected  from customers            and  FICA and  income taxes  withheld from  employees' wages.            Id. at  61-62.  This alone  did not resolve the  case because            __            the payments themselves could not be traced back under common            law  tracing  principles  to  any  particular  funds  of  the            taxpayer;   but,  relying   primarily   on  Bankruptcy   Code            legislative  history, the  Supreme  Court  decided that  "the            debtor's  act  of  voluntarily  paying   its  trust-fund  tax            obligation  . .  .  is  alone  sufficient  to  establish  the            required nexus between  the `amount'  held in  trust and  the            funds paid" to the IRS.  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  and thus the IRS, without  any direction            from  the corporation,  should have  applied the  payments to            cover the trust-fund tax liabilities.  Unfortunately for this            argument, the point of departure in Begier was the taxpayer's                                                ______            designation,  by agreement  with  the IRS,  that  all of  the            payments in that case would be  allocated to "specific trust-            fund tax  obligations" of the  taxpayer.  Id.  at 56.      In                                                      __            substance, Begier  gave effect  to this designation,  made at                       ______            the time of  payment, in order to classify the  funds used in            payment  as trust-fund taxes,  thereby shielding the payments            from  avoidance as  preferences.   In  the  present case,  by            contrast, R & M made  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  of a  taxpayer  designation upon  the  status of            payments  under the  preference provision  of  the Bankruptcy            Code, a provision  in no  way involved in  the present  case.            Begier did not,  either by reasoning  or result, address  the            ______            question  of how the IRS  should allocate payments  made by a            taxpayer who  fails to make  a designation.     It  is almost            unnecessary to add  that nowhere  in Begier  did the  Supreme                                                 ______            Court  suggest any intent  to overturn the  line of decisions            allowing the IRS, absent some direction from the taxpayer, to            apply payments to whichever  of the taxpayer's liabilities it            wishes.  That line of decisions disposes of this case.                 The judgment of the district court is affirmed.                                                       ________                                         -8-                                         -8-
