MEMORANDUM OPINION
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.
BACKGROUND
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. 1 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.
*341 The basic background facts do not appear to be in dispute. (See Stmt, of Mat. Facts 'in Supp. of Pis.’ 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. 2 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
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have paid payroll and employment taxes as and when they became due, and no interest or penalties would have accrued.” (Am. CompU 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.,
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.
DISCUSSION
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,
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,
“The term ‘reasonable cause’ is not defined in the tax code, but the relevant Treasury Regulation requires the taxpayer to demonstrate that he or she exercised ‘ordinary business care and prudence, but nevertheless was unable to file the return within the prescribed time.’” 3 Id. at 246, 105 S.Ct. *343 687 (quoting 26 C.F.R. § 301.6651(c)(1)). A failure to pay will be considered to be due to reasonable cause to the extent that the taxpayer has made a satisfactory showing that it exercised ordinary business care and prudence in providing for payment of his tax liability and was nevertheless either unable to pay the tax or would suffer an undue hardship if he paid on the due date. 26 C.F.R. § 301.6651-1(c)(1). “Undue hardship” in this context means more than mere inconvenience; the taxpayer must suffer a substantial financial loss if the taxes are paid on the due date. 26 C.F.R. § 1.6161-1(b). Thus, in order to establish “reasonable cause” under the applicable Treasury Regulations, plaintiffs must demonstrate that they exercised ordinary business care and prudence, and that payment of the taxes would impose an undue hardship.
The failure to remit trust fund money imposes a more stringent standard according to the Treasury Regulations. Treasury Reg. § 301-6651-1(c)(2) provides, in pertinent part:
[Consideration will be given to the nature of the tax which the taxpayer has failed to pay. Thus, for example, facts and circumstances which, because of the taxpayers’ efforts to conserve assets in marketable form may constitute reasonable cause for nonpayment of income taxes may not constitute reasonable cause for failure to pay over taxes described in section 7501 that are collected or withheld from any other person.
Id. Accordingly, the test for “reasonable cause” is more stringent when trust fund taxes are at issue than would be the case if the unpaid taxes were an individual’s income taxes.
The delinquent taxes at issue in this case included both the employers’ (plaintiffs’) and employees’ share of certain employment taxes. Thus, plaintiffs’ tax obligations included trust fund and non-trust fund taxes. See note 1, supra. Boiled down to its essence, we must determine whether plaintiffs’ excuse for nonpayment of these employment taxes justifies their decision to essentially ignore their obligations under the tax code in order to remain a going concern. In this connection, plaintiffs claim that absent then-decision to keep the business afloat by paying employees’ salaries rather than the employment taxes, the companies would have collapsed and they would not have been able to receive the settlement funds received in the global settlement with the government. They also state that their sound business judgment is further demonstrated because they did not invest funds in speculative or illiquid assets, nor did they incur lavish living expenses during the relevant time period. See 26 C.F.R. § 301.6651-1(c)(1). Moreover, plaintiffs maintain that it is undisputed that payment of the taxes would have imposed an undue hardship on plaintiffs because there were insufficient funds to meet both the companies’ tax and payroll obligations.
We note that the Third Circuit has not specifically ruled on the question of whether severe financial difficulties could constitute reasonable cause for the nonpayment of employment taxes under any circumstances. The two lower courts in our circuit which have addressed the issue held that the unfortunate circumstance of financial duress alone does not constitute reasonable cause such as to excuse the taxpayer from filing tax returns and paying employment taxes.
See In re Sykes & Sons, Inc.,
We hold as a matter of law that plaintiffs’ explanation does not establish reasonable cause as that term is defined in the Treasury
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Regulations. In this connection, we find the approach taken by the Sixth Circuit in
Brewery
persuasive.
Brewery Inc. v. United States,
The United States Bankruptcy Court for the Eastern District of Pennsylvania in In re Sykes followed the Sixth Circuit’s decision in Brewery. There the bankruptcy court aptly recognized that the “reasonable cause” standard involves two components: (1) the exercise of ordinary business care and prudence, and (2) undue hardship resulting from payment of the tax obligation. The court stated that while financial duress may establish the “undue hardship” prong of the reasonable cause standard, it does not obviate the need to establish the exercise of ordinary business care and prudence. There the court reasoned:
We believe that Congress had something more in mind in imposing an ordinary care requirement in addition to the undue hardship test. If ordinary care can be satisfied by showing that absent payment of other creditors, the business would have failed, ordinary care and undue hardship are in effect the same. To the extent that these cases [cited by taxpayer in Sykes and plaintiffs here] may be read to hold otherwise, we do not choose to follow them. Rather, we accept the IRS’s position that financial duress alone does not constitute reasonable cause such as to excuse the taxpayer from timely filing, deposit and payment of trust refund taxes.
In re Sykes,
Plaintiffs take the position that district courts should evaluate each case on its facts in determining whether a taxpayer has demonstrated reasonable cause even where the justification advanced for nonpayment of the tax liability is that the taxpayer was experiencing severe financial difficulties. They argue that this case is the paradoxical example of an instance where the taxpayer has exercised ordinary business care in the face of financial ruin because the financial duress was imposed upon plaintiffs through no fault of their own. In rejecting plaintiffs’ position in this regard, we recognize that there is case law which has adopted plaintiffs’ position. However, we find those cases unpersuasive for three reasons. First, we note that several courts have disagreed with the holdings in those cases.
See Brewery Inc. v. United States,
No. 92-212,
We similarly find that those cases cited and relied upon by plaintiff represent the minority approach. The majority of cases addressing this issue appear to hold the opposite: namely, that financial hardship does not establish reasonable cause for nonpayment of employment taxes.
See, e.g., Brewery,
We have also rejected plaintiffs’ arguments because it is clear that their position is inconsistent with the Treasury Regulations and the purpose of imposing penalties, which is to ensure prompt payment of taxes.
See Boyle,
Finally, we note that the only federal appeals court to have addressed this issue has squarely held that “financial difficulties can never constitute reasonable cause to excuse the penalties for nonpayment of withholding taxes by an employer.”
Brewery,
*347 An appropriate Order accompanies this Memorandum Opinion.
Notes
. Both parties repeatedly (and interchangeably) refer to "withholding taxes," "employment taxes” and "payroll taxes” without setting forth exactly the nature of the unpaid taxes owed by plaintiffs. (See, e.g. Am. Compl. ¶¶ 10, 11); "Pis.' Mem. of Law in Supp. of Pis.’ Mot. for Summ. J." (“Pis.' Br. in Supp.”) at 2; "Def.’s Mem. of Law in Supp. of Def.’s Mot. for Summ. J.” ("Def.’s Br. in Supp.”) at 1. However, plaintiffs recognize that the unpaid taxes represent both trust fund and non-trust fund taxes. ("Pis.’ Mem. in Supp. of Its Resp. and Objection to Def.’s Supp. Mem. and Reply to Def.’s Resp. to Mot. for Summ. J.” ("Pis.’ Reply Br.”) at 9.) It is apparent from tax forms referred to that the delinquent amounts included both the employees' share of social security taxes (Form 941) and the employers' share of unemployment taxes (Form 940). We proceed to analyze the issues herein based upon this understanding of the nature of the tax delinquencies from 1982 through 1988.
. The parties note that there is some disagreement as to the exact amount of penalties paid by the plaintiff. (See Pis.' Br. in Supp. at 2 n. 2; Def.’s Br. in Supp. at 3 n. 3.) However, we need not determine the exact amount for the purposes of this motion, as it is clear that plaintiffs' proofs do not demonstrate that the failure to remit said employment taxes is due to reasonable cause. See infra.
. Although not an exhaustive list, certain specific reasons for the late filing of a return will be accepted as reasonable cause under the Treasury Regulations.
See Roberts v. Commissioner of IRS,
. The court in
Fran Corp. v. United States,
While we recognize that a bright-line rule such as that adopted by the Sixth Circuit precludes a case-by-case inquiry into the specific financial situation of the debtor at the relevant time, our ruling does not render that Treasury Regulation a nullity; rather, our ruling only applies where the justification advanced is that financial duress or difficulty precluded payment of the employment taxes due to the IRS. In other words, where the taxpayer has provided another justification for the nonpayment of tax liability, consideration of the facts and circumstances of the taxpayer’s
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financial situation may be undertaken in determining the reasonableness of the excuse provided. In our view, our ruling today strikes the appropriate balance between that portion of 26 C.F.R. § 6651 — 1(c)(1) cited above, and 26 C.F.R. § 6651 — 1(c)(2) which requires the Court to consider the nature of the tax which the taxpayer has failed to pay. Here, the unpaid taxes include both trust fund taxes and non-trust fund taxes. The importance of payment of trust fund taxes cannot be disputed; those monies are supposed to be held in trust for the benefit of the government.
See United States v. Energy Resources,
. We note that one bankruptcy court in the Eastern District of Michigan followed the rule in
Brewery
but also recognized the possibility of an "equity or estoppel based exception to the rule when the government ... is the cause of the financial difficulty” which precluded payment of the employment taxes.
In re Gordon Sel-Way, Inc.,
No. 88-04525,
We decline to adopt such an exception to the general rule espoused in Brewery and its progeny. First, the contracts at issue in this case were entered into by the Defense Agencies; the government was acting in its capacity as a market participant in those transactions. In that circumstance, we see no reason to impute the intentional wrongdoing of certain employees of the Defense Agencies upon the IRS, which is a separate governmental agency acting in a wholly different capacity in collecting payroll taxes from employers. Moreover, the bankruptcy court in In re Gordon Sel-Way cited no authority in support of its adoption of an estoppel argument in this context, and did not choose to apply the exception in the case before it. Finally, we have not found any cases adopting the bankruptcy court’s exception in that regard.
. Assuming
arguendo
that we agreed with the approach taken in the cases relied upon by the plaintiff such that we did consider the facts and circumstances surrounding the non-payment of the employment taxes which occurred in this case, the same result would obtain. Plaintiffs assert that defense officials had been soliciting bribes from D'Antonio since 1976, a time long before the financial difficulties which occurred in this case. (Pis.’ Br. in Supp. at 33;
see also
D’Antonio Dep. at 34-35.) Plaintiffs state in their brief that at first, the officials only requested minor favors, and that the bribery scheme was nothing more than a minor annoyance. However, as time progressed, the employees' demands became greater, and plaintiffs were unable to accede to their demands, causing the companies to lose money and contracts with the Defense Agencies. (Pis.' Br. in Supp. at 33.)
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Given the long history of problems that plaintiffs experienced with the government officials involved in the bribery scheme, plaintiffs cannot argue that the government employees’ actions were unexpected.
Cf. Glenwal-Schmidt,