Opinion ID: 583422
Heading Depth: 2
Heading Rank: 3

Heading: the definition of unencumbered funds

Text: 31 This case requires us to set forth a more precise definition of unencumbered funds. In Kenagy, we stated that [u]nencumbered funds are those funds available after taking into account outstanding transactions. Kenagy, 942 F.2d at 465. However, the definition of unencumbered funds was not a central issue in Kenagy. Kenagy's definition of unencumbered serves when the issue is whether any unencumbered funds existed as of the moment the taxpayer becomes a responsible person. That definition is not as helpful when applied to the factual situation we now face. In our previous cases presenting similar factual circumstances, Kizzier and Olsen, we did not have occasion to specifically define unencumbered funds. 32 In defining unencumbered funds, we must keep the purpose of § 6672 in mind. 33 [Section] 6672 is simply a means of ensuring that the tax is paid. ... In keeping with this purpose, § 6672 has been broadly and liberally construed to prevent the unnecessary loss of tax funds by permitting the 'taxing authority to reach those responsible for the corporation's failure to pay the taxes which are owing.'  34 Olsen, 952 F.2d at 239 (citations omitted). Thus, our definition of unencumbered funds should be a broad one in order to ensure that the taxes are paid. 35 The case law offering a more precise definition for unencumbered funds is sparse. In re Premo, 116 B.R. 515 (Bankr.E.D.Mich.1990), sets forth the following definition: 36 Where the taxpayer's discretion in the use of funds is subject to restrictions imposed by a creditor holding a security interest in the funds which is superior to any interest claimed by the IRS, the funds are regarded as encumbered if those restrictions preclude the taxpayer from using the funds to pay the trust fund taxes. 37 Id. at 535. 3 The essential point of this definition is that funds are encumbered only where the taxpayer is legally obligated to use the funds for a purpose other than satisfying the preexisting employment tax liability and if that legal obligation is superior to the interest of the IRS in the funds. 38 We agree with Premo's definition of unencumbered funds, although we recognize that Premo involves a Slodov fact pattern but applies the rule of Mazo and Kizzier. We do not find, however, that Premo's failure to distinguish these two very different situations should cause us to reject Premo's definition of unencumbered funds. Premo's definition is consistent with the purpose of § 6672 and is clear in its application. Thus, we adopt this definition of unencumbered funds. We now turn to the application of this definition to the facts of this case.