The opinion of the court was delivered by: Cooper, District Judge.
This matter comes before the Court on cross-motions for
summary judgment by plaintiffs East Wind Industries, Inc. and
Delaware East Wind, Inc., and defendant the United States of
America. For the reasons articulated below, defendant's motion
is granted and plaintiffs' cross-motion is dismissed as moot.
Plaintiffs East Wind Industries, Inc. ("East Wind") and
Delaware East Wind, Inc. ("Delaware East Wind") bring this
action to recover tax penalties paid by both companies for
their failure to pay certain federal employment taxes and make
payroll deposits in accordance with their obligations under
the Internal Revenue Code. The delinquencies commenced in 1982
and continued intermittently through 1988. As we understand
it, plaintiffs failed to remit their employees' share of
federal social security taxes withheld by plaintiffs, as well
as the employers' share of federal unemployment taxes
(hereinafter collectively referred to as "employment taxes"),
and failed to deposit the monies withheld from their employees
in a government depository.*fn1 The basis for plaintiffs'
lawsuit is that 28 U.S.C. § 6651 and 6656 waive penalties for
the failure to pay employment taxes if the failure to do so is
due to "reasonable cause and not due to willful neglect." Id.
§§ 6651(a)(2), 6656.
The basic background facts do not appear to be in dispute.
(See Stmt. of Mat. Facts in Supp. of Pls.' Mot. for Summ. J.
("Mat. Facts") at 1 (noting that plaintiffs and defendant have
stipulated to the relevant background facts).) Plaintiffs are
both incorporated under the laws of Delaware. Plaintiff East
Wind manufactured military clothing and goods for sale to the
United States Department of Defense. From 1982 through 1986,
Delaware East Wind was a holding company that owned East Wind's
manufacturing plant. East Wind paid rent to Delaware East Wind
for the use of the building. In 1986, plaintiff East Wind
ceased operations, and plaintiff Delaware East Wind began to
bid for government contracts. (Id.)
Goods manufactured by plaintiffs were purchased by the
United States Government through its Defense Personnel Support
Center, and the contracts were administered by the Defense
Contract Administration Services. Both agencies are branches
of the Defense Logistics Agency. (Id.; D'Antonio Dep. at 22.)
The Court will refer to these agencies as the "Defense
Agencies," as it appears that the parties have adopted that
Beginning in 1976, certain employees of the Defense Agencies
began soliciting bribes from plaintiffs. (Stmt. of Facts ¶ 7;
D'Antonio Dep. at 34-35.) Plaintiffs contend that when they did
not submit to the defense employees' demands, they began having
business difficulties. Specifically, plaintiffs claim that they
had problems obtaining new contracts from the Defense Agencies.
Also, with respect to ongoing contracts, plaintiffs allege that
payments by the Defense Agencies were delayed, goods were
rejected, and certain orders were found to not comply with
specifications. (D'Antonio Dep. at 19-21, 35; Stmt. of Mat.
Facts ¶ 7.) However, it is undisputed that during the time in
question, the Defense Agencies made some contract payments, and
plaintiffs were awarded additional contracts by the Defense
Agencies. (D'Antonio Dep. at 18, 21, 26.) In addition,
plaintiffs' principal officer, Mario D'Antonio, admitted at his
deposition that he paid his employees during the relevant time
During the same time period that plaintiffs were
experiencing financial difficulties which they allege stemmed
from the illegal actions of certain government employees,
plaintiffs failed to withhold and pay certain employment
taxes. In addition, in or around 1984, both companies filed
Chapter 11 Petitions with the United States Bankruptcy Court
for the District of New Jersey. Also during this period, Mario
D'Antonio was approached by the Federal Bureau of
Investigation ("FBI"), and was asked to cooperate in an
investigation of the corrupt employees of the Defense
Agencies. D'Antonio went undercover in order to gather
information on the Defense Agencies in 1985, and worked with
the FBI for a period of two years. (D'Antonio Dep. at 30-44.)
Plaintiffs eventually filed claims against the Defense
Agencies for over $5,100,000 in damages. (Stmt. of Mat. Facts
¶ 8.) The parties entered into a global settlement which
resulted in plaintiffs receiving a total of $2,100,000 from the
government ($1,300,000 to East Wind and $800,000 to Delaware
East Wind). (Id. at ¶ 9-10.) The settlement was administered
through the Bankruptcy Court; as a result, plaintiffs paid all
of the taxes owed, in addition to some interest and penalties
assessed by the IRS.*fn2 The instant suit for a refund of the
interest and penalties paid followed.
Plaintiffs argue that they had reasonable cause for failing
to pay the amount of taxes owed to the IRS. Plaintiffs claim
that the government employees' corrupt practices left them
without recourse because if they paid the taxes owed, the
companies would have lost crucial employees and the
opportunity to remain a going concern. Plaintiffs state in
their Amended Complaint that if the Defense Agencies "had made
payments in a timely fashion, and if plaintiffs' claims had
been presented properly, then plaintiffs would
have paid payroll and employment taxes as and when they became
due, and no interest or penalties would have accrued." (Am.
Compl. ¶ 10.) Plaintiffs argue that, in a situation where the
result of payment of the payroll taxes is financial ruin, the
taxpayer has a "reasonable cause" for late payment, and
interest and penalties should not be imposed upon the
delinquent taxpayer. (Id.) In support of their argument in that
regard, plaintiffs rely upon a series of cases which found
reasonable cause in similar factual scenarios. See In re
Arthur's Industrial Maintenance, Inc., 1992 WL 132563, at *8
(Bankr.W.D.Va. 1992) ("[A] taxpayer's financial difficulties
may, in appropriate circumstances, constitute reasonable
cause."); In re Pool & Varga, Inc., 60 B.R. 722
(Bankr.E.D.Mich. 1986) ("Neither the statute nor the
regulations exclude the possibility that the taxpayer's
financial difficulties may constitute reasonable cause.
Instead, a fair reading of the regulations leads to just the
opposite conclusion."); Glenwal-Schmidt v. United States, No.
77-0902, 1978 WL 4527, at *2 (D.D.C. July 12, 1978) (taxpayer
argued that failure to remit trust fund taxes was due to
reasonable cause where taxpayer was involved in contract with
United States Navy and Navy defaulted on certain payments;
court found in favor of taxpayer, holding that taxpayer could
not have foreseen that Navy would not comply with the
requirements of the contract).
In contrast, defendant argues that plaintiffs cannot, as a
matter of law, establish reasonable cause for their failure to
pay the withholding taxes to the IRS under the circumstances
presented in this case. Defendant cites an alternative line of
cases which have taken the opposite approach on the issue,
namely that the fact that the taxpayer faces financial ruin if
such employment taxes are paid does not, under any
circumstances, establish reasonable cause for noncompliance
with the tax code.
Federal Rule of Civil Procedure 56(c) provides that summary
judgment is appropriate 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." In Anderson v.
Liberty Lobby, 477 U.S. 242, 251-52, 106 S.Ct. 2505, 91 L.Ed.2d
202 (1986), the Supreme Court noted that Rule 56(c) asks
"whether the evidence presents a sufficient disagreement to
require submission to a jury or whether it is so one-sided that
one party must prevail as a matter of law." Summary judgment is
appropriate where there is no genuine issue of material fact in
the case which requires a trial. See Celotex Corp. v. Catrett,
477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
Our task is to determine the outer boundaries of reasonable
cause. Only if plaintiffs' justification could be accepted
under the law as reasonable cause would there exist a genuine
issue of material fact for a fact-finder to decide whether
reasonable cause actually existed. See United States v. Boyle,
469 U.S. 241, 249 n. 8, 105 S.Ct. 687, 83 L.Ed.2d 622 (1985)
("Whether the elements that constitute `reasonable cause' are
present in a ...