John R. Duncan Joyce A. Duncan v. Commissioner of Internal Revenue Service

Under 26 U.S.C. § 6672 , when a person responsible for withholding and paying over employment or social security taxes willfully fails to do so, that person shall be liable to pay a “penalty equal to the total amount of the [unpaid] tax.” Appellant taxpayer John Duncan was, as officer and director of two corporations, a “person responsible for withholding and paying over employment” taxes of corporate employees. When he failed to do so, § 6672 liability was assessed against him and his wife. Similarly, Duncan failed to pay over withheld Oregon state taxes, and under an Oregon tax law that in some respects parallels § 6672, Duncan and his wife were held liable for those taxes. The Dun-cans satisfied both obligations.

The primary issue we must decide in this appeal is whether the Duncans may claim a deduction for the § 6672 penalty on their personal federal income tax return. The secondary question is whether the Duncans’ payment of Oregon state withholding taxes may be similarly deducted from their personal federal income tax; the taxpayers’ liability under Oregon law was not conditioned upon any “willful” failure to pay over the taxes. Finally, we are called on to decide whether,…