In the United States Court of Federal Claims
                                  No. 10-359T
                            (Filed: March 21, 2017)

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SCOTT B. GANN,

                      Plaintiff,            Reconsideration; 26 U.S.C. § 6672;
                                            Trust Fund Taxes; Trust Fund Tax
v.                                          Penalty; Willfulness; Reckless
                                            Disregard of a Known or Obvious
THE UNITED STATES,                          Risk; Implied Designation.

                      Defendant.

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       K. Lawson Pedigo, Dallas, TX, for plaintiff.

       Jason Bergmann, Tax Division, United States Department of Justice,
Washington, DC, with whom were Caroline D. Ciraolo, Principal Deputy
Assistant Attorney General, David I. Pincus, Chief, Court of Federal Claims
Section, G. Robson Stewart, Assistant Chief, and Jason S. Selmont, Trial
Attorney, for defendant

                                    ORDER

        On September 16, 2016, we issued a post-trial opinion in this tax refund
suit, finding that plaintiff recklessly disregarded the possibility that his
company would fail to remit to the Internal Revenue Service (“IRS”) all of the
FICA taxes withheld from employee paychecks. The IRS’s imposition of a
penalty against plaintiff personally for a willful failure to pay was thus proper
under 26 U.S.C. § 6672 (2012). We ordered the parties to consult and propose
the proper amount to be awarded on defendant’s counterclaim. Instead, on
October 14, 2016, plaintiff moved for reconsideration of our opinion. We
ordered defendant to respond and allowed plaintiff to file a reply. The motion
is fully briefed. Oral argument is unnecessary.

       The basis of plaintiff’s motion is that the payroll tax amounts paid to the
IRS by Humanity Capital, Inc. (“HCI”) for the fourth quarter of 2006 and the
first and third quarters of 2007 exceeded the amounts withheld from employee
pay during those quarters. This, according to plaintiff, is evidence of his
subjective intent to pay at least the trust fund tax owed for those quarters. He
argues that he thus should not be subject to a penalty for willful failure to pay
the trust fund tax owed for those quarters. That the IRS applied those monies
to plaintiff’s tax debts differently, resulting in a continuing trust fund tax
shortfall, ought not be sufficient to impute a willful motive to plaintiff, he says.
Plaintiff further notes that nothing on the IRS form 941s in evidence could
have alerted plaintiff to the fact that the IRS was going to apply the amounts
paid over by HCI to non-trust fund liabilities first. A plain reading of those
forms would reasonably have led Mr. Gann to conclude that HCI was paying
more than the trust fund tax liability, he avers. That is further evidence, in his
view, that he could not have been willful in failing to pay during those
quarters.

       We disagree. As the government points out in its response to the
motion, our holding was rooted in plaintiff’s failure to assure that HCI’s trust
fund tax liabilities were met after the third quarter of 2005. Plaintiff became
aware of HCI’s failure to pay all of its employment taxes, including trust fund
portions withheld from employee paychecks, after his company received a
notice from the IRS in November 2005 that related to the middle two quarters
of that year. He quickly reached a settlement agreement with the IRS and
subsequently submitted three payments to satisfy HCI’s obligation. We found
that Mr. Gann was thus on notice of the problem going forward from
November 2005.1 Gann v. United States, 

, 408 (2016). And
we found, in light of his regular involvement in the finances of the company,
that his failure to monitor the issue after then was, at minimum, a reckless
disregard of the known or obvious risk that trust fund taxes might not be paid
over to the IRS. 

see also Godfrey v. United States, 

          Though plaintiff saw to it that HCI’s back taxes were paid for the
second and third quarters of 2005, his company’s annual Securities and
Exchange Commission filing for the 2005 year showed a large payroll tax
liability for the fourth quarter. Subsequent quarterly filings also showed
expanding liabilities, a component of which were the unpaid trust fund taxes.
There is no question that plaintiff was on notice of the problem in November
2005, and the subsequent SEC filings show that he likewise had no reason to
think the problem was solved.

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1568, 1577 (Fed. Cir. 1984) (“Willful conduct may also include a reckless
disregard of an ‘obvious and known risk’ that taxes might not be remitted.”)
(quoting Feist v. United States, 

, 961 (Ct. Cl. 1979)). Because he
was a responsible person for the company, this recklessness made the IRS’s
imposition of a penalty proper. Nothing in plaintiff’s motion for
reconsideration calls that holding into question.

        In plaintiff’s reply, he argues that the IRS’s internal policies regarding
how it applies payments when a taxpayer has a mix of past and current
liabilities is a “gotcha” scheme that entraps the unwary taxpayer and
inequitably results in the assessment of penalties. In plaintiff’s view, the fact
that HCI remitted sums necessary to meet the trust fund portion of tax
obligations for particular quarters, notwithstanding that those payments were
insufficient to meet the total tax owed for those quarters, ought to prove him
not willful for those periods. The IRS’s own decision regarding how it applies
payments to outstanding liabilities should not form the basis of a finding of
scienter for purposes of a penalty for willful failure to pay taxes, urges
plaintiff.

         The law, however, is less sanguine about the consequences of unpaid
back taxes. In the quarters challenged by this motion, HCI’s employment taxes
were in arrears. The IRS’s policy of generally applying payments first to non-
trust fund liabilities and second to trust fund amounts owed is no secret nor is
it illegal. See Westerman v. United States, 

, 749 (8th Cir. 2013).
It is also not a secret that a taxpayer may make an express election to pay trust
fund liabilities first by making an explicit instruction to the IRS. 

that plaintiff made no election is not a defense, nor would it be a defense if he
was ignorant of that right.2

       As we held in September 2016, plaintiff had reason to know his
company was not meeting its trust fund tax obligations after November 2005,
and he either chose to ignore the problem going forward or was inexcusably
ignorant of it. We found that reckless and upheld the IRS’s imposition of a


       2
        We also reject plaintiff’s notion that he made an implied designation
by paying sums equal to or greater than the amounts withheld from employee
pay. See 

(rejecting the argument that the timing
and amount of a payment was sufficient to establish an express designation by
the taxpayer).

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penalty under 26 U.S.C. § 6672. The fact that the company remitted sums near
or equal to the amount of trust fund tax for particular quarters does not change
the general fact that HCI failed to stay current on its employment taxes during
every quarter at issue. The IRS lawfully applied payments consistent with its
policy, and the result was a trust fund tax shortfall for the quarters challenged
by this motion. In light of plaintiff’s reckless disregard of the potential for a
failure to pay, the imposition of a penalty was proper. Accordingly, plaintiffs’
October 14, 2016 motion for reconsideration is denied.

       Having resolved the motion for reconsideration, we again direct the
parties to file a joint status report proposing the proper amount for judgment
on defendant’s counterclaim on or before April 11, 2017.



                                            s/Eric G. Bruggink
                                            ERIC G. BRUGGINK
                                            Senior Judge




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