Aardema v. Fitch

August 22, 1997
Fifth Division

1-96-1253

NORMAN AARDEMA,                         )    Appeal from the
                                        )    Circuit Court of
          Plaintiff-Appellant,          )    Cook County.
                                        )
          v.                            )    
                                        )    
JAMES A. FITCH, LYNNE CUNNINGHAM,       )    
MUMTAZ CHAMPSI, and NINA KLARICH,       )    Honorable
                                        )    Victoria A. Stewart,
          Defendants-Appellees.         )    Judge Presiding.


     PRESIDING JUSTICE HARTMAN delivered the opinion of the court:

     Plaintiff, Norman Aardema, appeals the circuit court's order
dismissing with prejudice his amended complaint, which alleged
counts of unjust enrichment and common law contribution based upon
an Internal Revenue Service (IRS) assessment against him under 26
U.S.C.  6672 (section 6672) for failing to remit withheld employee
taxes.  Plaintiff contends the determination of "responsible
person" under section 6672 can be decided by a circuit court and,
therefore, his amended complaint should not have been dismissed. 
For the reasons which follow, we reverse and remand.
     Plaintiff and defendants, James A. Fitch, Lynne Cunningham,
Mumtaz Champsi, and Nina Klarich, were directors and shareholders
of Chicago Recycling Works, Inc. (CRW).  As an employer, CRW was
required to regularly withhold federal taxes from their employees'
wages, account for those withholdings, which constitute a trust
fund in favor of the government, and pay them over to the
government.  26 U.S.C.  3101-02, 7501.  If an employer fails to
pay the employees' withholdings over to the government, the
government does not have a right of recourse against the employee. 
To prevent revenue losses in the event an employer fails to pay
withheld taxes, section 6672 provides that when "[a]ny person
required to collect, truthfully account for, and pay over any tax"
willfully fails to do so, the person is liable for a penalty equal
to the total amount of the tax not paid over.  26 U.S.C.  6672(a). 
Section 6672, therefore, imposes a "100% penalty."  Hartman v.
United States, 538 F.2d 1336, 1340 (8th Cir. 1976) (Hartman).  Upon
default by a corporate employer, a corporate officer or employee
may be liable personally for the penalty established by section
6672 if during the period involved, the officer or employee was a
responsible person under 26 U.S.C.  6671(b), and the person acted
"willfully" regarding the employer's tax liability.  Hartman, 538 F.2d  at 1340; 26 U.S.C.  6671-72.  Pursuant to section 6672, the
IRS determined that plaintiff was responsible for CRW's failure to
pay withheld employees' taxes and thereafter levied several of
plaintiff's bank accounts, collecting the full amount of taxes,
interest and penalties assessed against CRW  $34,849.27.
     Plaintiff did not contest the IRS's determination that he was
a responsible person under section 6672, but thereafter filed a
complaint containing counts of unjust enrichment and implied
indemnity against defendants.  Defendants then moved to dismiss
plaintiff's complaint for failure to state a cause of action (735
ILCS 5/2 615 (West 1994) (section 2-615)) and plaintiff was granted
leave to file an amended complaint.  Plaintiff's amended complaint,
which contained counts of unjust enrichment and common law
contribution, alleged that defendant Fitch, as CRW's Chairman of
the Board, conducted board meetings and votes on CRW's tax
liability, including the board's decision not to honor payroll tax
obligations to the IRS.  Plaintiff's amended complaint averred that
each board member "is personally liable as a responsible person for
payment to the [IRS] of CRW's payroll taxes, interest and
penalties."  In count I, plaintiff claimed that each defendant "is
individually liable" for the imposed "taxes, interest and
penalties" and, therefore, each defendant was unjustly enriched. 
Count II sought common law contribution, alleging that since
plaintiff "paid more than his pro rata share of Defendants' common
IRS obligation," he was "entitled to contribution from Defendants
of their proportionate share of the common IRS obligation."
     Defendants moved to dismiss plaintiff's amended complaint
pursuant to section 2-615 for failure to state a cause of action. 
735 ILCS 5/2 615 (West 1994).  At argument on defendants' motion,
defense counsel maintained that section 6672 permits the IRS to
penalize a party for failure to pay taxes and the IRS alone
determines who is a "responsible party" under section 6672. 
Plaintiff's counsel asserted that by virtue of the board's
collective decision not to pay CRW's payroll taxes, defendants, as
board members, are considered responsible parties under section
6672 and have a common liability.  The circuit court granted
defendants' motion to dismiss plaintiff's amended complaint with
prejudice.  Plaintiff appeals.
                                     I
     Plaintiff initially contends the "penalty" assessed under
section 6672 represents an actual tax debt rather than a punitive
measure.  Defendants assert the IRS did not determine that they
were "responsible persons" for the unpaid taxes and the IRS can
still attempt to collect penalties from them, "separate and apart
from those amounts paid by" plaintiff.
     No action will be dismissed on a motion pursuant to section 2-
615 for failure to state a cause of action unless it clearly
appears that no set of facts can be proved under the pleadings
which will entitle plaintiff to relief.  People ex rel. Daley v.
Datacom Systems Corp., 146 Ill. 2d 1, 11, 585 N.E.2d 51 (1991). 
When deciding a motion to dismiss, all well pleaded facts in the
complaint will be regarded as true and all reasonable inferences
from them will be considered correct.  Krasinski v. United Parcel
Service, Inc., 124 Ill. 2d 483, 485-86, 530 N.E.2d 468 (1988).  The
dismissal of a complaint with prejudice under section 2-615
involves a question of law as to whether the complaint sets forth
facts which, if true, would entitle plaintiff to relief.  Fulton-
Carroll Center, Inc. v. Industrial Council, 256 Ill. App. 3d 821,
824, 628 N.E.2d 1121 (1993).
                                     A
     Section 6672(a) provides:
          "Any person required to collect, truthfully
          account for, and pay over any tax imposed by
          this title who willfully fails to collect such
          tax, or truthfully account for and pay over
          such tax, or willfully attempts in any manner
          to evade or defeat any such tax or the payment
          thereof, shall, in addition to other penalties
          provided by law, be liable to a penalty equal
          to the total amount of the tax evaded, or not
          collected, or not accounted for and paid
          over."  26 U.S.C.  6672(a).
          Persons who are "required to collect, truthfully account for, and
pay over any tax" are referred to as "responsible persons."  See
Slodov v. United States, 436 U.S. 238, 56 L. Ed. 2d 251, 98 S. Ct. 1778 (1978).  Although section 6672 provides a "penalty," section
6672 is substantively a tax.  Kelly v. Lethert, 362 F.2d 629, 633
(8th Cir. 1966); Hartman, 538 F.2d  at 1340; United States v.
Industrial Crane & Manufacturing Corp., 492 F.2d 772, 774 (5th Cir.
1974); King v. United States, 914 F. Supp. 335, 338 (W.D. Mo.
1995); Hill, Christopher & Phillips, P.C. v. United States Postal
Service, 535 F. Supp. 804, 810 (D.D.C. 1982) (Hill); Wollman v.
United States, 571 F. Supp. 824, 826 (S.D. Fla. 1983); Schoot v.
United States, 664 F. Supp. 293, 297 (N.D. Ill. 1987) (Schoot). 
Section 6672 is "merely a means whereby the government can collect
from a corporate officer or employee the taxes that the corporate
employer withheld and should have accounted for and paid over." 
Hartman, 538 F.2d  at 1340.
     Plaintiff argues that "the debt arising under" section 6672
"is imposed jointly and severally on all persons responsible for
the payment of employment taxes."  A section 6672 assessment,
however, "imposes a direct and personal, as opposed to a vicarious
liability on the person who is assessed" and although "two or more
persons may be jointly and severally liable under [section] 6672,
the government is not entitled to more than one satisfaction of the
tax liability owed to it."  Hartman, 528 F.2d  at 1340.  Nothing in
section 6672 precludes other parties from being responsible persons
and the cases which imply that a taxpayer is not a "responsible
person" until he or she has been assessed by the IRS arise in
idemnification contexts where plaintiffs attempt to shift all
liability to defendants.  See Alten v. Ellin & Tucker, Chartered,
854 F. Supp. 283 (D. Del. 1994) (Alten); Continental Illinois
National Bank & Trust Co. v. United States, No. 86 C 5335, slip op.
at 2 (N.D. Ill. June 5, 1987).
                                     B
     Plaintiff insists that the determination of whether defendants
are responsible persons is a question of fact which can be made by
a circuit court and the "case law surrounding [section] 6672 is
rife with instances in which trial courts made the determination of
responsibility," relying upon King v. United States, 914 F. Supp. 335 (W.D. Mo. 1995).  King does not support plaintiff's argument
because the taxpayers there were assessed a section 6672 penalty by
the IRS.  914 F. Supp.  at 338.  Following the assessment, the
taxpayer sought a refund in the district court, which then
determined whether plaintiff was entitled to a refund based upon
whether or not he was a "responsible person."  914 F. Supp.  at 338. 
King, then, is a typical appeal of the IRS's determination that a
taxpayer is a "responsible person."  See also Hartman, 538 F.2d  at
1339; Hill, 535 F. Supp.  at 810; Maggy v. United States, 560 F.2d 1372, 1374 (9th Cir. 1977); Wollman v. United States, 571 F. Supp. 824, 826 (S.D. Fla. 1983); Bowlen v. United States, 956 F.2d 723
(7th Cir. 1992).
     Plaintiff also relies upon Esstman v. Boyd, 605 S.W.2d 237
(Tenn. Ct. App. 1979).  In Esstman, plaintiff and defendant
organized a corporation and were the stockholders and directors. 
605 S.W.2d  at 239.  Plaintiff and defendant signed a contract of
guaranty to a bank "to guarantee an indebtedness to the Bank of the
foregoing corporation."  605 S.W.2d  at 239.  The corporation
subsequently became insolvent and failed to pay the note.  605 S.W.2d  at 239.  Plaintiff paid the note and sued defendant as co-
guarantor on the note.  The IRS issued a deficiency notice,
including a section 6672 penalty, against the officers and
directors of the corporation.  605 S.W.2d  at 239.  Plaintiff paid
the penalty and then sought contribution from defendant and his
wife for their share of the section 6672 penalty.  605 S.W.2d  at
239.  Plaintiff's second amended complaint alleged that "the
deficiency *** was assessed against the officers and directors of"
the corporation and pursuant to section 6672, "all the officers
[and] directors of the corporation are personally responsible to
pay over the withholding tax to the United States Government."  605 S.W.2d  at 239.  The Esstman court upheld the lower court's
determination that plaintiff could seek contribution from
defendant, reasoning that an injustice would result if defendant
were to avoid his responsibility for the taxes withheld.  The court
in Esstman also noted that although the IRS "did not make an
assessment of these unpaid taxes against the plaintiff and the
defendant Boyd as officers of the corporation in charge of its
finances, nevertheless, it is clear that the [IRS] could have, and
undoubtedly would have made such an assessment had not the
plaintiff paid these taxes which had been assessed against the
corporation."  605 S.W.2d  at 242.
     Esstman is distinguishable from the present case on two
grounds.  First, in Esstman, the IRS issued a deficiency notice
against the officers and directors of the corporation.  605 S.W.2d 
at 239.  Here, plaintiff's amended complaint does not allege that
a deficiency notice was issued against defendants.  Second,
plaintiff in Esstman, although never personally assessed with a
section 6672 penalty, nevertheless voluntarily paid the section
6672 assessment against the corporation.  In the case sub judice,
plaintiff did not voluntarily pay the section 6672 penalty; rather,
the IRS assessed a penalty against him alone and collected the
penalty by levying his bank accounts.  Esstman, therefore, is
inapplicable to the present case.
     Although section 6672 may distinguish between parties who
voluntarily pay an insolvent corporation's withheld taxes and
parties who are assessed a penalty by the IRS (see generally,
Esstman, 605 S.W.2d  at 242; Continental Illinois National Bank &
Trust Co. v. United States, No. 86 C 5335, slip op. at 1 (N.D. Ill.
June 5, 1987)), the salient point emerging from Esstman is that the
court and not the IRS made the determination that defendant was a
"responsible person."  The IRS has the sole ability to assess a
section 6672 penalty (see Internal Revenue Manual, P-5-60, MT 1218-
216); this does not, however, preclude other parties from being
responsible persons (see H.R. Rep. No. 104-506 (1996), reprinted in
1996 U.S.C.C.A.N. 1143, 1163), nor does it prevent the application
of state law remedies.  See generally Alten, 854 F. Supp.  at 288.
                                     C
     Plaintiff next argues that defendants cannot be assessed by
the IRS, notwithstanding they were responsible persons, because
plaintiff's payment of CRW's tax debt extinguishes any potential
defendants' liability to the IRS.  Defendants countervailingly
claim that the IRS independently still may pursue section 6672
penalties against them and plaintiff's payment of the tax debt has
not provided them a benefit or relieved them of a common
obligation.
     When a taxpayer is assessed a "penalty" under section 6672,
the taxpayer may appeal the assessment to the Appeals Office. 
Alten, 854 F. Supp.  at 291, citing 26 C.F.R.  601.103(c)(1),
601.106 (1993).  "After the Appeals Office, a taxpayer assessed
under [section] 6672(a) has only one method of further appeal: he
must pay all or part of the assessment, file a claim for refund
with the district director [and,] if such a claim is rejected or no
action is taken with respect to the claim within 6 months from the
date of filing, bring a civil action in the United States District
Court or United States Claims Court."  [Footnote.]  Alten, 854 F. Supp.  at 291, citing 26 U.S.C.  7422; 28 U.S.C.  1346(a)(1); 26
C.F.R.  601.103(c)(3); 22 A.L.R.3d 8, 188 (1968).  A person found
responsible for the payment of withheld corporate taxes must file
for a refund, and thereby challenge his or her tax liability,
within two years from the date the taxes are paid.  USLife Title
Insurance Co. ex rel. Mathews v. Harbison, 784 F.2d 1238, 1243 (5th
Cir. 1986) (USLife).  Plaintiff contends he has no basis for
challenging the assessment because he has admitted in his amended
complaint that he was personally liable as a director of CRW.
     Section 6672 does not prevent the government from collecting
and retaining from each responsible person a full satisfaction;
however, the government is entitled only to one full satisfaction
of delinquent withholding taxes.  See USLife, 784 F.2d  at 1243;
Hill, 535 F. Supp.  at 810.  When the government collects more than
one penalty, however, it must abate each responsible person's
penalty upon satisfaction of the original corporate payroll tax
liability.  Hill, 535 F. Supp.  at 810.  The IRS revenue manual
provides that "withheld *** taxes will be collected only once,
whether from the business, from one or more of its responsible
persons, or from the business and one or more of its responsible
persons.  Collection of the withheld *** taxes is achieved when the
[IRS's] right to retain the amount collected is established." 
Internal Revenue Manual, P-5-60, MT 1218-216.
     According to plaintiff's amended complaint, the IRS levied
against his bank accounts and collected the tax debt on March 30,
1995.  Plaintiff had two years from the date of payment to file for
a refund and challenge his liability (see USLife, 784 F.2d at 1243)
and, therefore, the IRS's right to retain the section 6672
assessment terminated after March 30, 1997, assuming plaintiff
followed his intention not to file for a refund.  CRW's tax debt is
satisfied and the IRS cannot assess section 6672 penalties against
defendants.  As aforementioned, section 6672 is not a penalty
provision, but a collection device whereby the government protects
against revenue losses.  Consequently, only the IRS can assess a
section 6672 penalty; this does not, however, preclude state law
remedies.
                                    II
     Plaintiff contends, based upon the foregoing, that he has
stated a cause of action for unjust enrichment.
     To state a claim for unjust enrichment, plaintiff must allege
"that defendant voluntarily accepted a benefit which would be
inequitable for him to retain without payment."  People ex rel.
Hartigan v. E & E Hauling, Inc., 153 Ill. 2d 473, 497, 607 N.E.2d 165 (1992), citing Premier Electrical Construction Co. v. La Salle
National Bank, 132 Ill. App. 3d 485, 496, 477 N.E.2d 1249 (1984).
     Plaintiff argues that he conferred a benefit upon defendants
by paying their portion of payroll taxes jointly owed by them to
the IRS.  Defendants, however, were never assessed a section 6672
penalty by the IRS and there is no allegation that defendants
voluntarily accepted the benefit.  Plaintiff has failed to state a
cause of action for unjust enrichment.
                                    III
     Plaintiff next contends he has stated a cause of action for
contribution.
     There is no federal right of contribution under section
6672.[fn1]  Schoot, 664 F. Supp.  at 297.  A person found liable
under section 6672, however, has a right to bring an action for
contribution if the right is asserted under state law.  See Alten,
854 F. Supp.  at 288, citing Schoot, 664 F. Supp.  at 298; Swift v.
Levesque, 614 F. Supp. 172, 177 (D. Conn. 1985).  "Contribution,
however, is not in itself a theory of recovery but merely a term
which describes the result desired.  The right to bring such an
action is actually based upon a more specific equitable or legal
theory."  Shapiro v. Chernoff, 3 Ill. App. 3d 396, 401, 279 N.E.2d 454 (1972).
     The court in Ruggio v. Ditkowsky, 147 Ill. App. 3d 638, 642,
498 N.E.2d 747 (1986), set forth the right of contribution as
follows:
          "In an action for common law contribution, the
          right to contribution arises due to the
          compulsory payment by a joint obligor of more
          than his share of a common obligation. 
          [Citations.]  Before one is entitled to
          contribution from his coobligor, the evidence
          must disclose that he has paid more than his
          just proportion of the joint indebtedness and
          it must also disclose what that excess is. 
          [Citation.]"
               Plaintiff claims that defendants' obligation is based upon the
corporate structure, which is a state-sanctioned contractual
relationship pursuant to the Business Corporation Act of 1983
(Act).  805 ILCS 5/1.01 et seq. (West 1994).  Although section 6672
does not impose a common obligation upon defendants and plaintiff,
the Act conclusively presumes that a corporate director who is
present at a meeting of the corporate's board of directors "at
which action on any corporate matter is taken" assents to the
corporate action unless the director dissents.  805 ILCS 5/8.65(b)
(West 1994) (section 8.65).  Further, "[a]ny director against whom
a claim is asserted under [section 8.65] and who is held liable
thereon, is entitled to contribution from the other directors who
are likewise liable thereon."  805 ILCS 5/8.65(d) (West 1994). 
Plaintiff's amended complaint alleges that defendants were CRW's
directors and shareholders who voted on corporate matters,
including the decision "not to pay [its] payroll tax obligations
due to the [IRS]."  These votes and decisions were documented in
CRW's corporate records.  When deciding a motion to dismiss, all
well pleaded facts in the complaint will be regarded as true and
all reasonable inferences from them will be considered correct. 
Krasinski v. United Parcel Service, Inc., 124 Ill. 2d 483, 485-86,
530 N.E.2d 468 (1988).  Plaintiff's amended complaint reveals that
CRW's board decided not to pay withheld employee taxes.  By failing
to pay these taxes, CRW's board of directors attempted to evade a
corporate obligation.  See also 805 ILCS 5/12.75(d) (West 1994). 
This obligation was subsequently placed upon plaintiff by "the mere
fortuity of IRS collection practices [which] should not shift the
ultimate burden of payment to only one of the parties."  Swift v.
Levesque, 614 F. Supp. 172, 177 (D. Conn. 1985).  Plaintiff has a
right to contribution where he had to pay "more than his share of
a common obligation."  See Ruggio, 147 Ill. App. 3d at 642, citing
Harris v. Buder, 326 Ill. App. 471, 475-76, 62 N.E.2d 131 (1945);
Gottschalk v. Gottschalk, 222 Ill. App. 56, 59 (1921).
     Defendants contend it is inequitable to permit plaintiff to
pursue a contribution claim because he was guilty of "willful
misconduct," relying upon Wynne v. Fischer, 809 S.W.2d 264 (Tex.
Ct. App. 1991).  In Wynne, plaintiff did not have a right to
contribution because the court there concluded that section 6672
set forth a "penalty."  809 S.W.2d  at 267.  It is clear, however,
that section 6672 is merely a collection device for the government
and is not meant to punish.  Schoot, 664 F. Supp.  at 297. 
Moreover, as noted by the Swift court, "[t]he government must
establish willfulness as a means to impose personal liability but
willfulness does not require a showing of 'bad purpose.'"  614 F. Supp.  at 177, citing Sherman v. United States, 490 F. Supp. 747,
754 (E.D. Mich 1980); see also Plato v. State Bank, 1996 S.D. 133,
555 N.W.2d 365 (S.D. 1996).  Further, precluding plaintiff from
pursuing a contribution cause of action against defendants would
lead to the inequitable result that defendants, although
responsible for CRW's failure to remit withheld taxes, are immune
from liability because the IRS, through unexplained random
practices, chose to proceed against and, thereafter, successfully
collected from, plaintiff.  See Swift, 614 F. Supp.  at 177, quoting
Feist v. United States, 607 F.2d 954, 963 (Ct. Cl. 1979). 
Defendants acknowledge that they could have been assessed a section
6672 penalty by the IRS; thus, it is mere happenstance that they
now sit as defendants instead of plaintiffs.  Plaintiff has
sufficiently stated a cause of action for contribution against
defendants and the circuit court erred in dismissing that part of
plaintiff's complaint.
     For the foregoing reasons, the circuit court's order
dismissing plaintiff's unjust enrichment count is affirmed and the
order dismissing plaintiff's contribution count is reversed.  The
cause is remanded to the circuit court for reinstatement of
plaintiff's contribution cause of action.
     Affirmed in part and reversed in part; cause remanded with
directions.
     HOURIHANE and SOUTH, JJ., concur.
     [fn1]26 U.S.C.  6672 was recently amended to include a
federal right of contribution.  The amendment, effective to
penalties assessed after July 30, 1996, provides:
          "If more than 1 person is liable for the
          penalty under subsection (a) with respect to
          any tax, each person who paid such penalty
          shall be entitled to recover from other
          persons who are liable for such penalty an
          amount equal to the excess of the amount paid
          by such person over such person's
          proportionate share of the penalty."  Act of
          July 30, 1996, Pub. L. No. 104-168,  903,
          1996 U.S.C.C.A.N. (110 Stat. 1453) (to be
          codified at 26 U.S.C.  6672).
          This amendment does not apply to the case sub judice.