Summary
The Supreme Court considered whether a corporate officer who acquired control of businesses after trust-fund employment taxes had been withheld and dissipated by prior management was personally liable under 26 U.S.C. § 6672. The Court held that § 7501 does not impress a trust on after-acquired corporate funds and that the petitioner did not violate § 6672 by using subsequently generated funds for business expenses when no trust funds existed at the time he assumed control. The judgment imposing liability for the pre-acquisition taxes was reversed.
Topics
Practice areas
Questions Presented
- Whether a person who assumes control of a corporation after previously collected trust-fund taxes have been dissipated may be personally liable under 26 U.S.C. § 6672 for failing to pay those taxes.
- Whether 26 U.S.C. § 7501 impresses a trust on after-acquired corporate funds so that a responsible person violates § 6672 by using those funds for ordinary business expenses rather than paying pre-acquisition withholding-tax liabilities.
- Whether the phrase in § 6672 referring to a person required to collect, truthfully account for, and pay over taxes limits liability to a person who could perform all three duties with respect to the particular tax dollars at issue.
Holdings
- A responsible person may violate the pay-over requirement of 26 U.S.C. § 6672 by willfully failing to pay over trust funds collected before the person's accession to control when the corporation has funds impressed with a trust under 26 U.S.C. § 7501 at the time control is assumed.
- Section 7501 does not impress a trust on after-acquired corporate funds that are not directly traceable to taxes collected or withheld. A responsible person therefore does not violate § 6672 by using such employer funds for purposes other than paying pre-acquisition trust-fund tax claims when no funds existed to satisfy those claims at the time control was assumed.
- The phrase in § 6672 referring to '[a]ny person required to collect, truthfully account for, and pay over' taxes limits the statute to persons responsible for collecting third-party taxes; it does not require that the person be in a position to perform all three duties with respect to the specific tax dollars at issue.
Key quotations
“We hold that a "responsible person" under § 6672 may violate the "pay over" requirement of that statute by willfully failing to pay over trust funds collected prior to his accession to control when at the time he assumed control the corporation has funds impressed with a trust under § 7501, but that § 7501 does not impress a trust on after-acquired funds, and that the responsible person consequently 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 not directly traceable to collected taxes referred to by that statute.” (259-260)
“Section 6672 cannot be read as imposing upon the responsible person an absolute duty to "pay over" amounts which should have been collected and withheld.” (254)
“The language of § 7501 limits the trust to "the amount of the taxes withheld or collected."” (256)
Factual background
Slodov purchased the stock and assumed management of three food-vending corporations on January 31, 1969. The corporations owed approximately $250,000 in taxes, including employee wage-withholding and FICA trust-fund taxes collected before Slodov took control; those specific funds had already been dissipated by the prior management. After the acquisition, the corporations had no liquid assets but generated receipts, which Slodov used for wages, rent, suppliers, inventory, and other operating expenses while paying current withholding taxes. The corporations ceased operations and filed for bankruptcy in July 1969 without paying the pre-acquisition trust-fund taxes.
Procedural history
Slodov initiated a Chapter XII bankruptcy proceeding in July 1969. The IRS filed a claim for unpaid employment taxes, and the bankruptcy judge found Slodov liable for certain taxes. The District Court held him liable for withholding taxes for the period after he assumed control. The Sixth Circuit reversed that ruling, but on the Government's cross-appeal held him liable for taxes withheld before his accession to control. The Supreme Court reviewed only the latter ruling.