DISTRICT JUDGE DENIES REQUEST FOR REFUND OF EMPLOYMENT TAXES.

                 IN THE UNITED STATES DISTRICT COURT

[2] IT IS SO ORDERED AND ADJUDGED.

Dated: August 4, 2000

ORDER GRANTING DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND DENYING PLAINTIFFS' CROSS-MOTION FOR SUMMARY JUDGMENT

[3] On July 28, 2000, this Court heard argument on defendant United States' motion for summary judgment and plaintiffs' cross- motion for summary judgment. Having carefully considered the argument of the parties ¹ and the papers submitted, the Court hereby GRANTS defendant's motion for summary judgment, and DENIES plaintiffs' cross-motion for summary judgment.

BACKGROUND

[4] On April 20, 1998, plaintiffs filed this action for recovery of internal revenue taxes and penalties erroneously or illegally assessed or collected pursuant to 26 U.S.C. section 7422(a). The complaint alleges the following facts: plaintiffs Harold and David Balzer were president and vice-president, respectively, of Balzer/Shopes, Inc. Beginning with the second quarter of 1993, Balzer/Shopes, Inc. failed to pay all required federal employment tax deposits due to "cash flow difficulties." Although in November 1993, Balzer/Shopes, Inc. was eventually able to obtain financing from Silicon Valley Financial Services ("SVFS"), a division of Silicon Valley Bank ("SVB"), the corporation failed to pay employment taxes for the second, third, and fourth quarters of 1993 and the first quarter of 1994.

[5] On February 18, 1994, the IRS recorded a Notice of Federal Tax Lien against Balzer/Shopes, Inc. for delinquent taxes totaling $404,399.09 for the second and third quarters of 1993. On April 1, 1994, Balzer/Shopes, Inc. made a proposal to the IRS for payment of its delinquent taxes, which it accompanied with payment totaling $289,879.13. Balzer/Shopes, Inc. designated that this sum be applied against its Trust Fund liability in reverse chronological order, and proposed several future installment payments to satisfy the remainder of the tax obligation. Although the IRS accepted payment of $289,879.13, no agreement regarding future payments was ever reached. Instead of designating the corporation's payment of $289,879.13 to the first quarter of 1994 and the fourth quarter of 1993, the IRS applied the corporation's payment to the second and third quarters of 1993.

[6] On June 10, 1994, Balzer/Shopes, Inc. filed for Chapter 11 bankruptcy protection. On June 22, 1994, the IRS filed a proof of claim in the bankruptcy, claiming a secured claim of $141,303,07. On July 7, 1994, the bankruptcy court issued an order which plaintiffs allege granted the IRS adequate protection for its claim in the amount of $141,303.07. After reapplying the corporation's payments to reverse chronological order as designated by Balzer/Shopes, Inc., the IRS filed an amended proof of claim asserting a secured claim of $428,447.04 on October 3, 1994.

[7] The Bankruptcy Court issued an order on October 28, 1994 approving a stipulation between SVFS and Balzer/Shopes, Inc. (debtor) regarding the use of cash collateral to fund liquidation expenses of the Chapter 11 estate. See Declaration of David M. Kirsch ("Kirsch Decl.") Exhibit F. On December 19, 1994, the corporation's bankruptcy was converted to a Chapter 7 proceeding. See Declaration of Harold J. Balzer ("Balzer Decl.") Paragraph 4. The parties agree that in January 1995 funds designated to secure the IRS's secure claim of $141,303 were transferred to the Chapter 7 trustee. However, there is a dispute between the parties over whether this amount has been paid to the IRS. Plaintiffs allege that the IRS received payment of $141,303.07. in full satisfaction of Balzer/Shopes, Inc.'s tax obligations. Plaintiffs contend that the IRS "admitted" it received the amount of the secured claim in a suit by the IRS against SVFS on the government secured claim. Plaintiffs' Cross-Motion for Summary Judgment and Opposition ("Pl. Cross-Motion & Opp'n") at 4:7-8. However, defendant contends the IRS received only two payments: a $50,000 payment pursuant to the settlement of Adversary Procedure, which the IRS credited to the Balzer/Shopes, Inc.'s non-trust fund employment tax liabilities; and a $10,640.27 payment which the IRS credited to Balzer/Shopes, Inc.'s post-petition employment tax liabilities. See Declaration of Jane Allen paragraphs 4-6. Defendant claims the funds segregated to secure the IRS's secured lien were used to "pay claims senior to the IRS's secured claim and claims entitled to priority." Def. Mot. for Summary Judgment at 3:26-28, 4:1-2.

[8] On January 8, 1996, the IRS assessed $156,700.51 each against plaintiffs Harold Balzer and David Balzer for unpaid employment taxes from the second and third quarters of 1993, the quarters covered by the lien discussed above. On March 7, 1996, plaintiffs each paid $150 of the assessments against them; they each filed claims for refund on that same day. On or about July 19, 1996, David Balzer paid $163,753.27 in full payment of the balance of the assessment against him, including interest to the date of payment.

[9] Plaintiff Harold Balzer seeks a judgment that he has overpaid his taxes in the amount of $150, and abatement of the balance of the assessment against him in the amount of $156,700.51. Plaintiff David Balzer seeks a judgment that he has overpaid his taxes in the amount of $156,700.51, together with interest as provided by law.

[10] Presently before the Court is defendant's motion for summary judgment and plaintiffs' cross-motion for summary judgment. There are two primary issues raised by the parties' motions, namely whether plaintiffs' willful failure to pay the corporation's tax obligation was vitiated by the actions of the IRS and whether the IRS exercised dominion, and control over the plaintiffs' prepetition accounts receivable thereby entitling the plaintiffs to credit for the value of the assets.

[11] On April 21, 2000, the parties stipulated that plaintiffs were responsible persons required to collect, truthfully account for, and pay over the employment taxes of Balzer/Shopes, Inc. for the second and third tax periods of 1993 and that plaintiffs willfully failed to do so for these periods. Plaintiffs' willful failure to collect, truthfully account for, and pay over the employment taxes of Balzer/Shopes, Inc. continued until June 10, 1994, when the corporation filed a Chapter 11 bankruptcy petition.

[12] In regard to the issue of willfulness, plaintiffs contend that their willfulness in originally failing to pay the tax obligation was vitiated by the IRS's failure to pursue the full amount of its claim in the bankruptcy proceedings. Plaintiffs argue that had the IRS filed a proper claim, there would have been sufficient assets to satisfy the unpaid taxes. Under these circumstances, plaintiffs argue, their failure to pay the taxes was excused and thus, they are entitled to a refund from the IRS.

[13] Defendant contends that plaintiffs' allegations concerning the IRS's unsuccessful efforts to collect unpaid taxes from the corporation during its bankruptcy are irrelevant because the IRS may still seek recovery of unpaid trust fund taxes from responsible persons who willfully failed to pay the taxes, namely Harold and David Balzer, under 26 U.S.C. section 6672.

[14] In the alternative, plaintiffs contend the IRS exercised dominion and control over the accounts receivable -- either as a matter of law as a secured creditor or through its participation in the bankruptcy proceedings. Plaintiffs argue that the corporation should receive credit for the value the IRS would have received if (1) it had not erred by failing to properly seek the true amount of its interest; or (2) it had not allowed inferior creditors to be paid first. Defendant argues that the IRS's participation in the bankruptcy proceedings does not constitute the government's dominion and control over the funds under the protection of the bankruptcy court and that the unsuccessful exercise of a lien does not prohibit the IRS from still pursuing section 6672 taxes from responsible officers.

LEGAL STANDARD

[15] Summary judgment is proper "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). The moving party bears the initial burden of demonstrating the absence of a genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548.,2553 (1986). The moving party, however, has no burden to negate or disprove matters on which the non-moving party will have the burden of proof at trial. The moving party need only point out to the Court that there is an absence of evidence to support the non- moving party's case. See id. at 325, 106 S. Ct. at 2554.

[16] The burden then shifts to the non-moving parry to "designate 'specific facts showing that there is a genuine issue for trial.'" Id. at 324, 106 S. Ct. at 2553 (quoting Fed. R. Civ. P. 56(e)). To carry this burden, the non-moving party must "do more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Electric Industrial Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S. Ct. 1348, 1356 (1986). "The mere existence of a scintilla of evidence . . . will be insufficient; there must be evidence on which the jury could reasonably find for the [non-moving party]." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S. Ct. 2505, 2519 (1986). "In meeting their burdens of proof, each party must come forward with admissible evidence. Conclusory, speculative testimony in affidavits and moving papers is insufficient to raise genuine issues of fact and defeat summary judgment," Cabo Distributing Co., Inc. v. Brady, 821 F. Supp. 601, 608 (N.D. Cal. 1992).

[17] In deciding a motion for summary judgment, the evidence is viewed in the light most favorable to the non-moving party, and all justifiable inferences are to be drawn in its favor. Anderson, at 255, 106 S.Ct. at 2513. "Credibility determinations, the weighing of the evidence, and the drawing of legitimate inferences from the facts are jury functions, not those of a judge [when she] is ruling on a motion for summary judgment." Id.

DISCUSSION

1. PLAINTIFFS' CROSS-MOTION FOR SUMMARY JUDGMENT BASED ON IRS'S

[19] In reference to plaintiffs' contention that the IRS exercised control and dominion over the corporation's accounts receivable, the IRS argues that Ninth Circuit precedent clearly establishes that the "unsuccessful exercise of [the IRS's] lien in bankruptcy court will not estop the government from collecting section 6672 taxes from responsible officers." Reply Memorandum and Opposition to Pls.' Cross-Motion for Summary Judgment at 4:13-16.

[20] First, plaintiffs cite United States v. Whiting Pool, 462 U.S. 198, 207, 103 S. Ct. 2309, 2315 (1983), as authority for their argument that the IRS exercised dominion and control over the corporation's accounts receivable as a matter of law by virtue of the IRS's position as a secured creditor. The issue before the Court in Whiting Pool was whether section 542 ² of the Bankruptcy Code "authorized the Bankruptcy Court to subject the IRS to a turnover order with respect to [] seized property." Id. at 199, 103 S. Ct. at 2311 (emphasis added). The Supreme Court held that the Chapter 11 "reorganization estate includes property of the debtor that HAS BEEN SEIZED BY A CREDITOR prior to the filing of a petition for reorganization." Id. at 209, 103 S. Ct. at 2315 (emphasis added). In the course of the opinion, the Court stated that:

     As does all bankruptcy law, section 542(a) modifies the

[21] Here, the Court finds plaintiffs' analysis of Whiting Pools unpersuasive. As stated above, the holding in Whiting Pools dealt with the interpretation of section 542 and the issue of whether assets seized by the IRS are subject to a turnover in reorganization. ³ 462 U.S. at 202, 103 S. Ct. 2312. Whiting Pools does not explicitly state, nor can it reasonably be construed to mean, that the IRS should be treated as having seized and exercised dominion and control over a corporation's assets merely because of its status as a secured creditor. While the Bankruptcy Code provides "various rights that replace the protection afforded by possession," it does not follow under the facts of this case that because the IRS had a lien against the corporation's assets, it should be deemed to have "seized" those assets sufficient to exercise dominion and control. ⁴ Whiting Pools, 462 U.S. at 207, 103 S. Ct. 2315.

[22] Accordingly, plaintiffs' cross-motion for summary judgment based on the IRS's alleged dominion and control over the prepetition account receivables is DENIED.

2. WAS PLAINTIFFS' WILLFULNESS VITIATED BY THE IRS'S CONDUCT?

[23] The second issue between the parties is whether the IRS's failure to collect the corporation's unpaid employment taxes from the bankruptcy estate relieves plaintiffs of their personal liability for the Section 6672 trust fund recovery taxes assessed against them. Defendant argues that plaintiffs are persons responsible to collect, truthfully account for, and pay over federal employment taxes, completely independent of the corporation's obligation to pay such taxes. Consequently, plaintiffs are liable for the corporation's obligation to pay over the employee withholdings to the government and the failure of the IRS to collect in bankruptcy proceedings does not relieve plaintiffs as responsible persons.

[24] Plaintiffs do not dispute their status as responsible persons. Nor do plaintiffs contest that they willfully failed to collect, truthfully account for, and pay over employment taxes of Balzer/Shopes, Inc. for the second and third tax periods of 1993 and that this willful failure continued until June 10, 1994. Instead, plaintiffs argue that they are not liable because "their prior willfulness was vitiated due to the IRS's conduct." Pl. Cross-Motion & Opp'n at 11:12-13. Plaintiffs contend that had the IRS correctly applied the corporation's payment initially, there would have been sufficient secured assets to pay the secured tax claim in full. Specifically, plaintiffs argue that because the IRS filed an incorrect claim; and because the amount secured by the claim the IRS did file was "squandered" by the IRS's failure to assert its superior secured interest, plaintiffs cannot be said to have willfully failed to pay the tax obligation and thus, the IRS cannot impose a section 6672 penalty against plaintiffs.

[25] Under 26 U.S.C. section 6672, liability for a penalty equal to the amount of a corporation's unpaid federal employment taxes "attaches to those with power and responsibility within the corporate structure for seeing that the taxes withheld from various sources are remitted to the Government." Monday v. United States, 421 F.2d 1210, 1214 (7th Cir. 1970). In this circuit,

     [i]n order for a party to be liable for a penalty for failure to

[26] Plaintiffs rely on Anderson v. United States, 77-2 U.S.T.C. paragraph 9701 (W.D. La. 1977), Tozier v. United States, 65- 2 U.S.T.C. paragraph 9621 (W.D. Wash. 1965), McCarty v. United States, 437 F.2d 961 (Ct. Cl. 1971), and Mangeri v. United States, 86-2 U.S.T.C. paragraph 9824 (D. Md. 1986) to support their argument that the IRS's conduct vitiates the plaintiffs' willfulness. However, the cases relied upon by plaintiff are distinguishable. In each case, either the plaintiff formed an agreement with the IRS to resolve the trust fund obligation, or the plaintiff's attorney assured the plaintiff that the debt would be satisfied by IRS's actions and the plaintiff took steps to ensure that it would be. In all these cases, the courts concluded the failure to pay taxes was not willful because the plaintiffs relied on the advice of their attorneys or an agreement with the IRS, believing that they had taken sufficient actions to ensure the taxes would be paid.

[27] However, in this case plaintiffs admit that although they attempted to negotiate a repayment agreement with the IRS, no agreement was ever reached. Cf. Tozier, 65-2 U.S.T.C. paragraph 9621; Mangeri, 86-2 U.S.T.C. paragraph 9824. Moreover, plaintiffs do not contend that they relied on the advice of their attorneys in failing to pay the outstanding tax obligation, or that they notified the IRS of the bankruptcy proceedings or encouraged the IRS to submit a correct claim of secured interest. Cf. Anderson, 77-2 U.S.T.C. paragraph 9701. Since plaintiffs fail to allege facts that would bring them into these recognized exceptions where willfulness is vitiated, plaintiffs are still responsible persons liable for the unpaid tax.

[28] It is well-established that "the liability of a responsible person imposed by section 6672 is separate and distinct from [that] imposed upon the employer." Turchon v. United States, 77 B.R. 398, 401 (E.D.N.Y. 1987); see also Teel, 529 F.2d at 906. Furthermore, the IRS is not obligated to pursue the assets of the corporation before pursuing responsible persons. Turchon, 77 B.R. at 401; Bernardi v. United States 74-1 U.S.T.C. paragraph 9170 (N.D. Ill. 1973) ("It is unnecessary for the Internal Revenue Service even to attempt collection from the corporate employer, before asserting the personal liability of the responsible persons."). Nor does the IRS's alleged compromise in bankruptcy of the corporation's obligation preclude it from subsequent recovery from the responsible corporate officers. Turchon, 77 B.R. at 401. Accordingly, the IRS was not required to attempt collection from the corporation before attempting collection from plaintiffs as responsible persons and the IRS's conduct in the corporation's bankruptcy proceedings preclude recovery from plaintiffs.

[29] Here, the IRS has pursued plaintiffs as responsible persons for Balzer/Shopes, Inc.'s outstanding tax obligations. Since pursuant to section 6672, the government can seek to recover trust fund employment taxes from the person responsible for paying over such amount, and because plaintiffs do not allege sufficient facts to show that the conduct of the IRS vitiates their willful failure to pay the employment taxes, the defendant's motion for summary judgment is GRANTED and plaintiffs' cross-motion for summary judgment is DENIED.

CONCLUSION

[30] For the reasons set forth above, defendant's motion for summary judgment is GRANTED and defendant's cross-motion for summary judgment is DENIED.

[31] IT IS SO ORDERED.

Dated: August 4, 2000.

² Section 542 of the Bankruptcy Code authorizes the turnover of property to a bankruptcy estate. Section 542 provides:

     (a) Except as provided in subsection (c) or (d) of this section,

⁴ Plaintiffs rely on a series of cases holding that once the IRS seizes an asset and exercises dominion and control over that asset, a taxpayer is entitled to credit for the value of assets seized by the IRS. See United States v. Pittman, 449 F.2d 623, 624 (7th Cir. 1971) (holding that where the government actually seized control and dominion over taxpayer's property, the taxpayer is entitled to credit for the property seized); see also In re Barlows, Inc., 36 B.R. 826 (1984); Cash v. United States, 961 F.2d 562 (5th Cir. 1992). Since the Court does not find that the IRS seized the corporation's assets, these cases are inapposite. Plaintiffs' contention that IRS exercised dominion and control over the assets by participating in the bankruptcy proceedings presumes that the IRS is in the same legal position as if it had seized the corporation's assets. As discussed above, the IRS's actions did not constitute a seizure and therefore, the IRS could not have exercised dominion and control over the assets.