Calvey v. United States

• Decision Date: 15 September 1971
• Docket Number: No. 20989.,20989.
• Citation: 448 F.2d 177
• Parties: Lawrence A. CALVEY and Vivian H. Calvey, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

448 F.2d 177 (1971)

Lawrence A. CALVEY and Vivian H. Calvey, Plaintiffs-Appellees, v. UNITED STATES of America, Defendant-Appellant.

No. 20989.

United States Court of Appeals, Sixth Circuit.

September 15, 1971.

William L. Goldman, Atty., Tax Div., Dept. of Justice, Washington, D. C., for defendant-appellant; Johnnie M. Walters, Asst. Atty. Gen., Meyer Rothwacks, Crombie J. D. Garrett, Attys., Tax Div., Dept. of Justice, Washington, D. C., on brief; John P. Milanowski, U. S. Atty., Grand Rapids, Mich., of counsel.

James A. Park, Lansing, Mich., for plaintiffs-appellees; Robert W. Stocker, II and Fraser, Trebilcock, Davis & Foster, Lansing, Mich., on brief.

Before EDWARDS and MILLER, Circuit Judges, and McALLISTER, Senior Circuit Judge.

EDWARDS, Circuit Judge.

Appellees Calvey, a husband and wife, brought suit for refund of cabaret taxes ($3,870.34, plus interest) which they had been assessed and had paid. The appellant United States of America filed a counterclaim for $132,872.44, plus interest, alleging fraudulent understatement of the taxes due. In the years concerned the Calveys, as partners, had operated a nightclub (the Northview Lounge) in Sault Ste. Marie, Michigan.

After full hearing a District Judge in the United States District Court for the Western District of Michigan found for the government on all issues except one. He found partnership; he found fraudulent understatement of taxes by the partnership; he found Mrs. Calvey was a partner; but because he found Lawrence Calvey to be the dominant figure in the fraudulent filing, he refused to apply any of the tax consequences of the fraud to Mrs. Calvey individually. He held that she did not participate in the fraud and knew nothing about it.

In his second opinion in this case the District Judge gave this description of the background facts:

"As pointed out in the opinion of the Court at the conclusion of the trial of the case on October 27, 1969, this business was not operated in fact as a partnership in the true sense of the word, because Lawrence Calvey was obviously at the times involved, and certainly at the time immediately preceding the trial, at the time the assessments were made, a most dominant person. Mrs. Calvey had the choice of either being completely subordinate or walking out. But it appears from the transcript of the testimony, which has only recently been received, of Mrs. Calvey, and upon reconsideration of the facts, that there is more to the partnership than we considered.

"Previously, Lawrence Calvey and Vivian Calvey\'s father had been partners in this business, and by her testimony on October 27, 1969, her father intended that she should have his interest and she so testified. His interest was a partnership interest. The license, admittedly, was in the name of Lawrence A. Calvey and Vivian H. Calvey, and had to be renewed annually, and had to be exposed in a conspicuous place in the business. In addition to that, she signed a number of the tax returns on the excise tax, and she signed them as a partner; and there is nothing in this record to show that Lawrence Calvey insisted that she so sign. As a matter of fact, the indication is to the contrary, that he didn\'t know what she put in there, and there is nothing to show that he did know. She put her name down and marked it as partner.

"Let\'s face it, gentlemen, she is an intelligent woman. She is not stupid. She knows what a partner is, and when she put the word `partner\' down, I am satisfied that she knew what she was doing."

It thus appears that the District Judge determined that the wife was a full partner in the operation of this nightclub, but he found injustice in ascribing any of the fraud to her or in allowing a judgment reflecting the consequences of the fraud to be entered against her personally. In this regard he relied upon Scudder v. Commissioner of Internal Revenue, 405 F.2d 222 (6th Cir. 1968), cert. denied, 396 U.S. 886, 90 S.Ct. 176, 24 L.Ed. 2d 161 (1969).

Before this court, appellees rely on Scudder and also on Huelsman v. Commissioner of Internal Revenue, 416 F.2d 477 (6th Cir. 1969), and Sharwell v. Commissioner of Internal Revenue, 419 F.2d 1057 (6th Cir. 1969), as illustrating this court's reluctance to approve "appallingly harsh" results.

We hope that reluctance to endorse "appallingly harsh" results will always characterize our decisions and we note that subsequent to the three cases relied upon by appellees, Congress has moved to correct the inequity which Scudder, et al., pointed out. Pub.L. 91-679, Laws of the 91st Cong., 2d Sess.; 84 Stat. 2063 (1971).

The government, however, points out that Scudder, et al., involved joint income tax returns but did not involve partnerships. It asserts that under general partnership law and under partnership laws of the State of Michigan in particular, an innocent partner is responsible for penalties induced by fraudulent conduct of an operating partner.

It does not appear to us that this case presents either the same problems or the same inequities that were involved in the three cases relied on by appellees. All three of them involved joint income tax returns between husbands and wives. In Scudder and in Huelsman the fraud upon the government consisted of the joint taxpayer husband failing to report or pay tax on money which he had embezzled. In each case the wife was the sole or a principal victim of the embezzlement and the "fundamental unfairness" was in making the victim of a crime pay the tax consequences of the husband's failure to pay tax on the money stolen wholly or in large part from her. In short, the wife not only did not benefit; actually she was a victim. In Sharwell the court merely remanded for fact finding to ascertain whether or not a similar situation existed.

In this case, however, we deal with a business partnership where the wife was an active partner and signed the partnership returns. She had inherited her share of the partnership in the Northview Lounge from her father. The accountant for the business testified that the profits of the partnership business were divided between the partners. Obviously, these profits on this record resulted in part from cabaret taxes fraudulently withheld. While the District Judge found that the husband was the dominant partner and the wife was without knowledge of the fraud (findings which we accept) we do not believe that requiring her to face the tax consequences of fraud from which she previously benefited parallels the "fundamental unfairness" found in Scudder and Huelsman.

The federal law under which the cabaret tax is assessed is set forth in 26 U.S.C. § 4231, Repealed Pub.L. 89-44, Title III, § 301; 79 Stat. 145 (1965) (effective date Dec. 31, 1965):

"(6) Cabarets. — A tax equivalent to 10 percent of all amounts paid for admission, refreshment, service, or merchandise, at any roof garden, cabaret, or other similar place furnishing a public performance for profit, by or for any patron or guest who is entitled to be present during any portion of such performance. The tax imposed under this paragraph shall be returned and paid by the person receiving such payments; * * *. No tax shall be applicable under paragraph (1) or (2) on account of an amount paid with respect to which tax is imposed under this paragraph."

The term "person" as used above is defined in 26 U.S.C. § 7701(a) (1) (1964) to include a partnership. The consequences of willful or fraudulent withholding of the tax are set forth in 26 U.S.C. § 6501(c) (2) (1964) and § 6653 (b) (1964). But the federal revenue code makes no specific reference to the liability of partners as individuals.

General partnership law, however, including that of Michigan, entitles an inactive partner to his or her share of partnership profits. It also visits upon said partner his or her share of partnership liabilities, even though the liabilities were created solely by an active partner completely without knowledge of the inactive one.

The governing law pertaining to the instant case is represented by two sections of the Uniform Partnership Act adopted by Michigan in 1922:

"§ 20.13 Liability of partnership for wrongful act of partner. Sec. 13. Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership, or with the authority of his copartners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act." Mich. Stats.Ann. § 20.13 (1964), M.C.L.A. § 449.13.

"§ 20.15 Joint and several liability of partners; separate obligation of partner to perform firm contract. Sec. 15. All partners are liable:

(a) Jointly and severally for everything chargeable to the partnership under sections thirteen 13 and fourteen 14;

(b) Jointly for all other debts and obligations of the partnership; but any partner may enter into a separate obligation to perform a partnership contract." Mich.Stats.Ann. § 20.15 (1964), M.C.L.A. § 449.15.

This statute has been applied to hold partners individually liable for damages arising from partnership torts for which the partner individually had no responsibility. Soberg v. Sanders, 243 Mich. 429, 220 N.W. 781 (1928); Schram v. Perkins, 38 F.Supp. 404 (E.D.Mich.1941).

While we find no Michigan "penalty" cases, we note that Mich.Stats.Ann. § 20.13 specifically provides that the partnership is liable for "any penalty * * * incurred" by any wrongful act or omission of any partner in the ordinary course of the business. It appears clear that the fraud penalties here involved were incurred in the regular course of this partnership business. But Mich. Stats.Ann. § 20.15 also makes "all partners" liable jointly and severally for everything chargeable to the partnership under sections 13 and 14.

We see no way to exempt the instant appellee Mrs. Calvey from the tax fraud penalties...