The Tax Man Cometh Plan Confirmation Does Not Free Responsible Officers From Trust Fund Recovery

By: Eric J. Dostal

St. John's Law Student

American  Bankruptcy Institute Law Review Staff

Recently, in J.J. Re–Bar Corp. v. United States (In re J.J. Re–Bar Corp.)[1] the Ninth Circuit held that the Anti–Injunction Act[2] does not bar the post-confirmation collection of a trust fund recovery penalty (“TFRP”)[3] from the responsible officers of a debtor corporation by the IRS.[4] The Ninth Circuit, relying on Davis v. United States[5] determined that because TFRP liability arises from officers’ willful conduct, such penalties are the obligations of the officers themselves and not the debtor corporation.[6] This case arose after the IRS assessed a TFRP against the Skokans, the corporate officers responsible for the company’s failure to remit certain “trust fund taxes–the tax withholdings from employee paychecks–to the government.”[7] The IRS chose to assess the TFRP against the responsible officers of the debtor after the debtor had confirmed its plan and paid its outstanding payroll taxes.[8] Seeking to halt the IRS’ collection efforts, J.J. Re–Bar “filed a motion to enforce . . . the Plan and to hold the IRS in contempt.”[9] Both the Bankruptcy Court and the Bankruptcy Appellate Panel ruled for the IRS.[10]    

In affirming the Bankruptcy Court and the Bankruptcy Appellate Panel, the Ninth Circuit addressed three main issues: (1) whether the debtor corporation or its responsible officers were the primary obligors under 26 U.S.C. § 6672; (2) whether the TFRP was an obligation existing under a plan of reorganization or a separate liability; and (3) whether the Anti–Injunction Act prevailed over the relevant provisions of the Bankruptcy Code.[11] The first factor was not seriously disputed and the Skokans were determined to be the responsible officers pursuant to 26 U.S.C. § 6672 due to the fact that J.J. Re–Bar Corp. was a closely held family corporation.[12] The Ninth Circuit also held that section 6672 “operates as a penalty by creating an obligation, separate and distinct from the underlying tax obligation.”[13] Therefore the second factor was also met because TFRP liability is distinct from the original tax debt, thus the penalty was not covered by the Plan.[14] Finally, the court concluded that the Anti–Injunction Act prohibits courts from restraining the IRS from assessing or collecting any tax including a TFRP obligation.[15] The court went on to conclude that “an explicit effort to disclaim [section] 6672 liability in a bankruptcy plan cannot avoid the reach of the Anti–Injunction Act.”[16] The Ninth Circuit also relied heavily on its opinion in American Bicycle Assoc. v. United States (In re American Bicycle Association)[17] which held “the Anti–Injunction Act precludes a bankruptcy court from enjoining the IRS from collecting a [TFRP] assessed under 26 U.S.C. § 6672.”[18]

J.J. Re–Bar sought to distinguish its case from American Bicycle by arguing that the Anti–Injunction Act “only bars courts from issuing new injunctions in independent legal proceedings.”[19] The Ninth Circuit declined to restrict the holding of American Bicycle in this manner, creating a comforting level of stability within the law.[20] The Ninth Circuit’s recent decision is in harmony with decisions reached by the Fourth and Eighth Circuits which have also found that the of the Anti–Injunction Act precludes courts from enjoining the IRS from collecting a TFRP.[21]  This decision reinforces the truism that tax assessments will be granted preferential treatment by the courts. As a result, it is sound advice to any responsible officer to honor payroll tax obligations.