Source: https://casetext.com/case/diamond-plating-co-v-us
Timestamp: 2019-02-20 11:45:13
Document Index: 72884353

Matched Legal Cases: ['§ 3101', '§ 3301', '§ 3101', '§ 3301', '§ 6651', '§ 6651', '§ 6656', '§ 301', '§ 301']

Diamond Plating Co. v. U.S, 390 F.3d 1035 | Casetext
Diamond Plating Co. v. U.S.
390 F.3d 1035 (7th Cir. 2004)
Diamond Plating Co.v.U.S.
United States Court of Appeals, Seventh CircuitDec 6, 2004
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favoring creditors and employees over the government severely undermines argument about undue hardship
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Phillip H. Hamilton (argued), Farrell, Hunter, Hamilton Julian, Godfrey, IL, for Plaintiff-Appellant.
Diamond Plating is a family-run metal finishing business with about thirty employees in Madison, Illinois. Joseph and Loretta Clark owned all of the company's stock until Joseph's death in 1997, at which time Loretta Clark became the sole shareholder. Loretta Clark was also the company president during the relevant time period, though she took a limited role in the operation of the business. Clark's children, Robert Cox and Gina Scaturro, played a more active role in the business, Cox as the vice-president of operations and Scaturro as the secretary-treasurer. Cox was responsible for hiring and firing employees, bidding on jobs, and dealing with customers and vendors, while Scaturro was in charge of all accounting-related activities, including paying creditors, filing Federal Insurance Contributions Act ("FICA") and Federal Unemployment Tax Act ("FUTA") tax returns, and depositing and paying the associated taxes.
Under FICA, 12.4% of wages up to an annual limit must be paid into Social Security, and an additional 2.9%, not subject to an annual limit, goes to Medicare. 26 U.S.C. §§ 3101- 3111. Employers and employees split the cost, with the employee's portion automatically deducted from his or her paycheck. Id. The FUTA tax requires employers to pay 6.2% on the first $7,000 in wages paid to each employee. 26 U.S.C. § 3301-3311. FICA and FUTA taxes often are referred to as employment taxes or payroll taxes.
The Internal Revenue Code requires employers to withhold FICA taxes from the wages of their employees, remit the withheld taxes to the IRS on a quarterly basis, and report the amount of the withheld taxes on a quarterly payroll tax return. 26 U.S.C. §§ 3101- 3111. While they are still in the possession of the employer, the withheld funds are referred to as "trust fund" taxes, with the employer acting as a trustee for the government. In re Avildsen Tools Machine, Inc., 794 F.2d 1248, 1249 (7th Cir. 1986). "Non-trust fund" taxes, on the other hand, are taxes that are not collected from employees' wages, such as an employer's share of Social Security taxes. Id. The Code also requires employers to file an annual FUTA tax return and pay the corresponding unemployment tax liability. 26 U.S.C. § 3301-3311. Where an employer fails to file FICA or FUTA tax returns, or fails to deposit or pay the FICA or FUTA tax liability shown on the tax returns, the Code provides for a mandatory penalty, unless the taxpayer shows that the failure was due to reasonable cause and not due to willful neglect. 26 U.S.C. § 6651(a)(1); 26 U.S.C. § 6651(a)(2); 26 U.S.C. § 6656(a).
In the instant case, Diamond Plating failed to timely file its employment tax returns for 1998 and 1999, and failed to timely deposit and pay its corresponding tax liability. The sole issue before us is whether Diamond Plating has established reasonable cause to excuse its noncompliance. Although the Code does not define reasonable cause, the relevant Treasury regulation requires Diamond Plating to demonstrate that despite exercising "ordinary business care and prudence," it "was nevertheless either unable to pay the tax or would suffer an undue hardship if [it] paid on the due date." 26 C.F.R. § 301.6651-1(c)(1). When assessing Diamond Plating's ability to pay the taxes, "consideration will be given to all the facts and circumstances of [its] financial situation. . . ." Id. The regulations also provide that the employer will be held to a heightened standard when trust fund taxes are at issue. 26 C.F.R. § 301.6651-1(c)(2). The Supreme Court has described the taxpayer's burden in establishing reasonable cause as a heavy one. United States v. Boyle, 469 U.S. 241, 245, 105 S.Ct. 687, 83 L.Ed.2d 622 (1985).
Diamond Plating contends that it had reasonable cause for nonpayment of its employment taxes due to financial distress caused by the loss of its main customer in late 1995. Diamond Plating points out that Virco accounted for 80% of its business until the end of 1995, when Virco moved its metal finishing in-house. With the loss of Virco's business, Diamond Plating's revenue decreased by more than 50% between 1995 and 1996. Diamond Plating urges us to join a number of other circuits by recognizing that financial hardship can, under some circumstances, justify failure to pay and deposit employment taxes, and to find that a reasonable jury could find those circumstances present in this case. See Van Camp Bennion v. United States, 251 F.3d 862, 868 (9th Cir. 2001); East Wind Indus., Inc. v. United States, 196 F.3d 499, 507-08 (3d Cir. 1999); Fran Corp. v. United States, 164 F.3d 814, 819 (2d Cir. 1999). But see Brewery, Inc. v. U.S., 33 F.3d 589, 592 (6th Cir. 1994). According to Diamond Plating, it would have been forced out of business or into bankruptcy if it had paid the 1998 and 1999 employment taxes.
We also note that some of the delinquent taxes were trust fund taxes. Rather than remitting these taxes to the government on a quarterly basis after withholding them from employee wages, Diamond Plating used the funds for operating expenses. Because this practice makes the government "an unwilling partner in a floundering business," Collins v. United States, 848 F.2d 740, 741-42 (6th Cir. 1988), companies withholding trust fund taxes must provide strong justification to avoid penalties. Diamond Plating has failed to provide such a justification. Indeed, the undisputed evidence shows that the company's officers favored all other creditors and themselves over the government, which severely undermines Diamond Plating's arguments about financial distress.