Boynton v. U.S.

• Decision Date: 03 October 1977
• Docket Number: Nos. 76-1639 and 76-1638,s. 76-1639 and 76-1638
• Citation: 566 F.2d 50
• Parties: 77-2 USTC P 9703 Charles O. BOYNTON, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Counterclaimant-Appellee. Abe TAPIA, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Counterclaimant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 50

566 F.2d 50

77-2 USTC P 9703

Charles O. BOYNTON, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Counterclaimant-Appellee.

Abe TAPIA, Plaintiff-Appellant, v. UNITED STATES of America, Defendant-Counterclaimant-Appellee.

Nos. 76-1639 and 76-1638.

United States Court of Appeals Ninth Circuit.

Oct. 3, 1977.

Rehearing and Rehearing En Banc Denied Dec. 9, 1977.

Phillip Singer, George T. Altman, Beverly Hills, Cal., for plaintiff-appellant.

J. Clancy Wilson, Asst. U.S. Atty., Los Angeles, Cal., Earl J. Silbert, U.S. Atty. Gen., Dept. of Justice, Washington, D.C., M. Carr Ferguson, Asst. Atty. Gen., U.S. Dept. of Justice, Tax Div. App. Section, Washington, D.C., for defendant-counterclaimant-appellee.

Appeal from the United States District Court for the Central District of California.

Before ELY and HUFSTEDLER, Circuit Judges, and LINDBERG, District Judge. ^*

ELY, Circuit Judge:

Tapia and Boynton appeal from a judgment against them for the balance of unpaid taxes assessed under section 6672 of the Internal Revenue Code of 1954. The appellants were employees of Joint Venture of the Northeast Valley (Joint Venture), a non-profit corporation. Joint Venture's function was to provide community services in the Los Angeles, California, area under a contract with the Economic Youth and Opportunities Agency (EYOA). EYOA provided all the funds for Joint Venture's operations. Joint Venture obtained these funds by submitting invoice transmittals to EYOA for amounts expended in operating. Included on these invoice transmittals were payroll summaries revealing the gross payroll, including amounts for employee withholding and FICA taxes. Joint Venture received monies from EYOA for the entire gross payroll, including taxes for the tax quarters ending September 30 and December 31, 1971. None of these tax monies were paid to the Government, the funds being used to pay other creditors, primarily employees with wage claims. Tapia served as the Executive Director of Joint Venture and Boynton as the Administrative Assistant. The directors of Joint Venture were community citizens serving as volunteers without compensation. Although directors only were authorized to sign checks for Joint Venture, both Tapia and Boynton were active in the financial management and control of the corporation, preparing budgets and tax returns, approving billings and payments, and preparing checks.

In 1973 the Government assessed the 100% penalty tax under 26 U.S.C. § 6672 against Tapia and Boynton for their failure to pay over the withholding and FICA taxes for the third and fourth quarters of 1971. The total amount assessed was $12,764.55. Appellants paid $131.50, and pursuant to 28 U.S.C. § 1346 instituted a suit for refund in the District Court. The Government contested the refund action and counter-claimed for the unpaid balance of the assessed tax. The District Court found that it lacked jurisdiction over the appellants' refund claim because the entire amount of the assessment, or some properly divisible part thereof, had not been paid. The court, however, retained jurisdiction over the counterclaim. It found that both Tapia and Boynton were responsible persons within the meaning of section 6672 and that they had willfully failed to pay over the taxes by according to other creditors preference over the Government. Judgment in the Government's favor was entered for the full amount of the counterclaim. Tapia and Boynton appeal.

Both the appellants and the Government have presented this appeal as involving the sole issue of whether the District Court correctly found that the actions of Tapia and Boynton were willful within the meaning of section 6672. We pass consideration of that issue, however, and dispose of this appeal on jurisdictional grounds that we feel obliged to raise sua sponte.

It has long been established that partial payment of assessed taxes or a proposed deficiency is insufficient to support jurisdiction in the District Court of a refund suit under 28 U.S.C. § 1346. Flora v. United States, 362 U.S. 145, 80 S.Ct. 630, 4 L.Ed.2d 623 (1960). An exception to the Flora rule has developed with respect to divisible tax assessments. Under the doctrine of Steele v. United States, 280 F.2d 89 (8th Cir. 1960), a taxpayer assessed under section 6672 need only pay the divisible amount of the penalty assessment attributable to a single individual's withholding before instituting a refund action. This relaxed requirement is based on the theory that section 6672 assessments represent a cumulation of separable assessments for each employee from whom taxes were withheld. Thus, under Steele, the taxpayers were "legally entitled to make payment of the penalty applicable to the withheld taxes of any individual employee, to make claim for refund, and to institute suit for recovery, as a means of settling the question of the right of the government to have made penalty assessment against them in the circumstances of the situation." Id. at 91.

Here, the situation is different. We therefore conclude that the District Court properly dismissed the appellants' refund suit after finding that full payment of the entire assessment or payment of the portion attributable to the withholding of a single employee had not preceded the commencement of the action.

Nonetheless, the District Court assumed jurisdiction over the Government's counterclaim and rendered a decision on the merits. The Government's counterclaim had an independent federal jurisdictional basis, since, had the suit been directly initiated by the Government, there would have been clearly prescribed jurisdiction in the District Court under 28 U.S.C. § 1340 and 26 U.S.C. § 7402. In this case, as well as the typical section 6672 case, an action by the Government for the collection of the balance of an assessment, or counterclaim in a refund suit to that effect, involves exactly the same issues as the taxpayer's refund suit. The resolution of such issues would be dispositive of the taxpayer's right to a refund of his partial payment of the taxes. While we recognize that a District Court generally may adjudicate a counterclaim having an independent basis for federal jurisdiction despite the dismissal of plaintiff's action for lack of subject matter jurisdiction, DHL Corporation v. Loomis Courier Service Inc., 522 F.2d 982, 985 (9th Cir. 1975); National Research Bureau, Inc. v. Bartholomew, 482 F.2d 386 (3d Cir. 1973), we think the application of that general principle should be inapposite in the situation where the taxpayer has failed to meet even the most minimal payment requirement needed for subject matter jurisdiction in federal court. We hold that the proper course of action for the District Court would have been to dismiss the Government's counterclaim after finding that it lacked jurisdiction over the taxpayer's refund suit.

Congress has established a precise and detailed jurisdictional scheme to deal with judicial adjudication of federal tax disputes. When a taxpayer has been notified of a proposed tax deficiency, he has the option of either (1) filing a petition in the Tax Court, or (2) paying the tax, applying for a refund credit and, if that is not allowed, suing in a federal court for recovery of the alleged overpayment. If the taxpayer elects to sue for refund in the Court of Claims pursuant to 28 U.S.C. § 1491 or in the District Court under 28 U.S.C. § 1346, payment of the full tax must, except in situations involving divisible taxes, precede the refund action. There is no such requirement in the Tax Court when the taxpayer seeks to contest a notice of deficiency. ¹ However, because a section 6672 assessment need not be preceded by the normally required deficiency notice, Shaw v. United States, 331 F.2d 493, 494-95 (9th Cir. 1964), a condition precedent needed for Tax Court jurisdiction, a deficiency notice, is not present. DaBoul v. Commissioner of Internal Revenue, 429 F.2d 38 (9th Cir. 1970). Consequently, the taxpayer is foreclosed from litigating the validity of the penalty assessment in Tax Court. Wilt v. Commissioner of Internal Revenue, 60 T.C. 977 (1973). Notwithstanding his inability to litigate in the Tax Court, ² the taxpayer is still required under the Steele doctrine to pay at least the part of the 100% section 6672 assessment attributable to the withholding taxes of any one employee before he can maintain a refund action. ³ In any event, the taxpayer is entitled to whatever actual or perceived benefits ⁴ that might be incidental to litigating in District Court only if full payment of at least a properly divisible portion of the disputed taxes has been made. ⁵ The jurisdictional approach employed in this case vitiates the heart of this elaborate scheme, payment of the taxes before litigation of the issues in a District Court. Appellants did not pay even the miniscule amount needed for satisfaction of the penalty assessed based on the failure to remit to the Government the withholding taxes of a single employee. By retaining the Government's counterclaim after dismissal of the refund suit for lack of subject matter jurisdiction, the court effectively allowed the dispositive issues of the taxpayer's refund suit to be resolved in the District Court without the required prior payment of taxes assessed. Moreover, those issues were decided in a suit in which the initiative as to timing and choice of forum ⁶ was taken by the taxpayer. Allowing the controlling issues of taxpayer's refund suit to be decided in a procedural posture in which the plaintiff is the defending party may well create tactical advantages, such as possible transfers of burdens of proof, see Psaty v. United States, 442 F.2d 1154, 1158-63 (3rd Cir. 1971), that would not exist had the refund suit been properly brought. ⁷ The full impact of the Flora decision has already been mitigated in the section 6672 situation by substantially decreasing the prepayment burden on refund suits. Yet,...