United States v. Hill

• Decision Date: 22 December 1966
• Docket Number: No. 22605.,22605.
• Citation: 368 F.2d 617
• Parties: UNITED STATES of America, Appellant, v. T. E. HILL, Jr. and Larry Moore et al., Appellees. T. E. HILL, Jr. and Larry Moore, Appellants, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

368 F.2d 617 (1966)

UNITED STATES of America, Appellant, v. T. E. HILL, Jr. and Larry Moore et al., Appellees.

T. E. HILL, Jr. and Larry Moore, Appellants, v. UNITED STATES of America, Appellee.

No. 22605.

United States Court of Appeals Fifth Circuit.

November 7, 1966.

Rehearing Denied December 22, 1966.

Paul W. Eggers, Wichita Falls, Tex., Eggers, Sherrill & Pace, Wichita Falls, Tex., of counsel, for appellants T. E. Hill, Jr., and Larry Moore.

Melvin M. Diggs, U. S. Atty., Dallas, Tex., Louis F. Oberdorfer, Asst. Atty. Gen., Lee A. Jackson, Atty., Dept. of Justice, John B. Jones, Jr., Acting Asst. Atty. Gen., I. Henry Kutz, Robert H. Solomon, Attys., Dept. of Justice, Washington, D. C., C. Moxley Featherston, Richard M. Roberts, Acting Asst. Attys. Gen., Meyer Rothwacks, Atty., Dept. of Justice, Martha Joe Stroud, Asst. U. S. Atty., of counsel, for the United States.

Lee Sellers, Prothro & Sellers, Wichita Falls, Tex., for appellees, City Nat. Bank in Wichita Falls and Jack Jeffus.

L. E. Elliott, Brundidge, Fountain, Elliott & Churchill, Dallas, Tex., for appellee, Trinity Universal Ins. Co. and Henry Yates.

Harold D. Rogers, Wichita Falls, Tex., Leonard Passmore, Austin, Tex., for amicus curiae Texas Bankers Ass'n.

Before JONES, COLEMAN and AINSWORTH, Circuit Judges.

COLEMAN, Circuit Judge.

By judgment on a jury verdict, T. E. Hill, Jr. and Larry Moore, of Wichita Falls, Texas, officers and stockholders of Hill and Moore, Inc., were held individually liable for penalties prescribed by Section 6672 of the Internal Revenue Code of 1954.¹ There were jury verdicts against the bank, bonding company, and certain of their officers, with which the defaulting corporation did business. The District Court entered judgment non obstante in favor of the latter defendants. Hill and Moore appeal from the judgment against them; the Government appeals the action in favor of those absolved. We affirm as to all parties.

I. FACTS

Hill and Moore, Inc., was incorporated under the laws of Texas on April 24, 1961. From that time through 1962, Moore was President and Hill was Secretary-Treasurer of that corporation. Each owned fifty per cent of its stock. The corporate business was the construction of family and military type housing units for United States Army and Air Force bases in Texas and Oklahoma as well as for the Federal Housing Authority in Del Rio, Texas.

Prior to incorporation, Hill and Moore had operated as a partnership. The partnership assets and liabilities were transferred to the corporation. In 1961, the partnership assigned its construction contracts to the City National Bank in Wichita Falls as collateral for interim funds advanced, and to be advanced, as construction projects required. Subject to this prior assignment, on January 1, 1962, the corporation was performing on contracts at Del Rio, Texas, and Sheppard Field, Texas. It was then owed certain funds for completed projects at Fort Sill, Oklahoma, and Connally Air Force Base, Texas. Performance bonds on all of these projects, except the one at Connally Air Force Base, were written by Trinity Universal Insurance Company.

The method used for payment of withholding and F.I.C.A. taxes due for the second and third quarters of 1961 was a combination of the depository receipt method for the first two months of the quarter, followed by direct payment by company check for the third month, the check being forwarded with the Employer's Quarterly Federal Tax Return. Payment was duly made for October and November. The quarterly tax return due January 31, 1962 was not filed until February 27, 1962. The return brought with it no payment for December, 1961. Later, quarterly returns for $23,819.38 without payment, were filed on April 23, 1962; for $1706.80 on July 21, 1962; and for $201.98 on August 20, 1962. The corporation ceased doing business about September 1, 1962.

By January, 1962, Hill and Moore, Inc., was in severe financial difficulty. Hill and Moore, the individuals, made a survey of assets, accounts payable, outstanding notes, and other liabilities and saw they "were in the hole". The deficit amounted to as much as $400,000. The situation was explained to the Bank by a conference with its Vice President, Jack Jeffus, one of the defendants below, appellee here. Mr. Hill testified that this conference took place during the latter half of January, he thought on January 18. Mr. Jeffus said that it was on February 1. In any event, on January 18, the Corporation owed the Bank $318,000, as opposed to $53.82 on deposit in its checking account. On January 31, 1962, the Corporation owed $16,033.13 in taxes and had a balance of $10.36 in its checking account. Income taxes withheld in December, 1961, and social security taxes accounted for the $16,033.13.

As will be discussed later, liability, if any, of the Bank and Jeffus, must depend on their connection with the Corporation and its operations between January 18, 1962 and February 21, 1962, the date on which Trinity Universal Insurance Company entered the picture.

By the same token, liability of Trinity and its agent, Henry Yates, depends on their participation after February 21. As of that date, the Corporation owed the Bank $82,321.78 as contrasted with $318,000 on January 18.

The jury verdicts as to all defendants were for the United States. The evidence in favor of the Government, and inferences reasonably to be drawn therefrom, must be accepted as true. Applying this principle, the facts were as follows:

At all pertinent times in issue, the Bank, the Insurance Company, and their agents herein named, knew the Corporation had withheld income taxes on its employees and had not remitted to the Government, nor had it paid the Social Security taxes.

By virtue of the assignments executed and delivered in 1962, the entire income of the corporation from its construction projects was the property of the Bank.

The corporation had had unrestricted use of funds in its bank account during 1961. Jeffus testified that the bank never had the right to refuse to pay any check drawn if the corporation had funds available to cover it. Several deposits were made into the corporation bank account during February, 1962 which did not originate from the assigned contracts.

From January 18 through February 21, Hill and Moore testified, all checks for $500 or more were approved by Jeffus before payment. It is clear that Jeffus refused to honor overdrafts, and thus make loans, except for essential bills, and there was an agreement that Hill and Moore would advise the bank of large disbursements. Checks came over Jeffus' desk prior to payment.

During the first three weeks of February, 1962, the Bank made several loans to the Corporation by allowing contract progress payments assigned to the Bank to be deposited in the corporate bank account for payment of bills essential to keep the jobs going and cover net payrolls.

It became apparent that the Corporation would not be able to finish the jobs without the help of its bonding company. Sometime around February 12, 1962, Hill and Moore, at their own initiative, conferred with officials of Trinity Universal Insurance Company in Dallas. On February 21, 1962, an agreement was executed between the Corporation, Trinity Universal, and the Bank.

Pursuant to this agreement, Trinity Universal guaranteed a $100,000 loan from the Bank to the Corporation. A special bank account known as the Hill & Moore, Inc. Operating Fund was established. The initial $100,000 deposit was made February 22, 1962. Checks drawn on this account by Hill and Moore had to be approved by Mr. Yates or Mr. Powell of the bonding company.

Also on February 22, 1962, Hill caused a check to be written for the balance of the fourth quarter 1961 withholding taxes. When presented to Powell for approval, he refused the check because his instructions were not to pay the corporation's taxes. The check was never signed by Hill or Moore.

II. THE PLEADINGS

All of the taxes shown to be due on the corporation's quarterly tax returns for the period December 1961 — September 1962 were assessed against the corporation. The Internal Revenue Service was unsuccessful in collecting these taxes from the corporation, which at the time of trial had no assets.

In 1964, Hill and Moore each paid the District Director of Internal Revenue $100.99, the penalty assessed for the third quarter of 1962, and sued for a refund. That precipitated this litigation. The United States alleged as third-party plaintiff that the City National Bank, Jack Jeffus, Trinity Universal Insurance Company and Henry Yates, as third party defendants, were liable to the United States for the whole amount of the taxes in controversy, $41,761.29.

The case was tried by the District Court, sitting with a jury. At the conclusion of the testimony before the jury, each party in turn moved for a directed verdict. The Court overruled each motion.

Responding to special interrogatories, the jury found that:

(1) Hill, Moore, the Bank, and Jeffus were liable for the penalty for the fourth quarter of 1961;

(2) Moore and Hill were not liable for the penalty for any part of 1962. The Government did not appeal the judgment rendered on this part of the verdict (3) The Bank and Jeffus were liable for the penalty in the first quarter of 1962;

(4) Trinity Universal Insurance Company and Henry Yates were liable for the penalty in all three quarters of 1962.

Each of the parties, except the United States, moved for judgment N.O.V. Motions were denied as to Hill and Moore and granted as to the others. Hill and Moore appeal as to the fourth quarter of 1961 and the Government appeals the judgments N.O.V.

THE LAW

We now consider the law of the case.

Section 6672 provides that before the penalty can be assessed the following must exist:

(1) There must be a person;

(2) He must be one who is required to collect, truthfully account for, and pay over taxes, and

(3) He must wilfully

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