Duly Noted

Scott Murphy, Barnes and Thornburg defend client against IRS assessment in trials lasting over a decade

After 13 years of litigation and two trips to the Sixth Circuit Court of Appeals, Barnes and Thornburg LLP successfully defended Eric Kus, the former CEO of a tier-two automotive supplier, Eagle Trim, Inc., from an Internal Revenue Service tax assessment under 26 USC Section 6672 in excess of $1,000,000.00.

Scott Murphy of the Grand Rapids office originally filed this tax abatement action in 2004 against the United States Government seeking an abatement of “trust fund” tax liability on behalf of Eric Kus. In 2006, a motion for summary judgment was filed on behalf of Eric Kus claiming that he did not willfully fail to pay employee withholding taxes to the Government for the second, third and fourth quarters of 2000. The DOJ filed a competing motion for summary judgment which the Eastern District of Michigan granted in 2006, finding that Eric Kus was a “responsible” taxpayer who willfully failed to pay trust fund taxes. This decision was appealed to the Sixth Circuit and in 2010 was overturned by a panel of three judges and remanded back to the District Court on the issue of willfulness and whether Eric Kus had the “ability to pay” at the time he learned of the tax delinquency. After significant motion practice, the case was tried before Judge Tarnow (the same judge that previously granted summary judgment in favor of the Government) of the Eastern District of Michigan in June of 2015 on the issue of willfulness. The defense presented evidence that the company controller had committed fraud and concealed the tax delinquency from the CEO as well as the president of Eagle Trim, Roger Byrne, and that the company accountants failed to detect this fraud after conducting a full scope audit of Eagle Trim’s financial records. The court disagreed and found Eric Kus and Roger Byrne liable based on prior instances of late payments to the IRS. According to the District Court, Kus and Byrne had a duty to investigate the tax liability upon learning of those delinquencies.

The District Court’s decision was appealed to the Sixth Circuit in 2015. At oral argument, the Sixth Circuit was concerned with two primary issues: (i) which standard of review applied to a bench trial; and (ii) whether Eric Kus was reasonable in his belief that the trust fund taxes had been remitted to the IRS (both issues of first impression in the Sixth Circuit). In a published opinion May 15, 2017, the Sixth Circuit reversed the District Court, finding that Kus did not willfully fail to pay withholding taxes because his belief that the trust fund taxes were remitted was reasonable. The Sixth Circuit remanded the case to the District Court for proceedings on Appellants’ right to recover the assets seized by the IRS over the past 10 years in satisfaction of the Judgment.