The opinion of the court was delivered by: Mary L. 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. See footnote 1*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 designation.
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 period.
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. See footnote 2*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.Colo. 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 (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 Celolex Corp. v. Catrett, 477 U.S. 317 (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 (1985) ("Whether the elements that constitute `reasonable cause' are present in a given ...