Section of Taxation Publications
  VOL. 53
NO. 4
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 Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.

Should Financial Difficulties Constitute Reasonable Cause for Nonpayment of Employment Taxes? The Third Circuit's Robin Hood Response in: East Wind Industries, Inc. v. United States

Victoria L. Yeager


In East Wind Industries, Inc. v. United States, the Third Circuit held that the taxpayer was entitled to an abatement of the penalties on its delinquent employment taxes, because the nonpayment of trust fund taxes was due to reasonable cause, rather than willful neglect. The court stated that severe financial difficulties can constitute reasonable cause for the nonpayment of employment taxes under certain circumstances. The taxpayer sought the refund of penalties paid on delinquent employment taxes pursuant to sections 6651(a)(2) and 6656(a). The court rejected the Sixth Circuit’s bright-line rule that financial difficulties per se do not constitute reasonable cause for abatement of penalties assessed under sections 6651 and 6656, and instead considered all the facts and circumstances of the taxpayer’s situation.

Parts I and II of this Note present the statutory background and describe the underlying facts and major issues presented in the case. Part III explains the district court and Third Circuit opinions. Part IV argues that the Third Circuit applied the correct test, but reached the incorrect outcome, and contemplates East Wind II’s impact.


Published by
Section of Taxation, American Bar Association
With the Assistance of
Georgetown University Law Center


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