U.S. v. Metro Const. Co., Inc.
| Decision Date | 08 August 1979 |
| Docket Number | No. 77-3484,77-3484 |
| Citation | 602 F.2d 879 |
| Parties | 79-2 USTC P 9530 UNITED STATES of America, Appellee, v. METRO CONSTRUCTION COMPANY, INC., Appellant. |
| Court | U.S. Court of Appeals — Ninth Circuit |
D. Earl Ellis, Walter, Finestone & Richter, Los Angeles, Cal., for appellant.
Gilbert E. Andrews, Dept. of Justice, Tax Div., Washington, D.C., on brief; Micheal L. Paup, Dept. of Justice, Washington, D.C., for appellee.
Appeal from the United States District Court for the Central District of California.
Before CHOY and GOODWIN, Circuit Judges, and EAST *, District Judge.
The Internal Revenue Service assessed Metro Construction Co. (Metro) for payroll taxes owed by its subcontractor, Triple A Estimating & Construction Service (Triple A), for the first two quarters of 1972. In an action for a refund, the district court held that because Metro advanced money for its subcontractor's payroll, and Metro knew or should have known that Triple A would not withhold or pay its federal payroll taxes, Metro was vicariously liable for the taxes and interest under section 3505(b) of the Internal Revenue Code.
Metro does not contest its liability for the assessed amount of Triple A's payroll taxes; it disputes only a part of the judgment allowing the government to collect "interest as provided by law". Metro does not argue that the imposition of interest charges was in itself erroneous. It asserts, however, that section 3505(b) imposes a ceiling on the amount Metro will have to pay. This ceiling, Metro argues, is 25 per cent of the amount it advanced to Triple A.
The amount Triple A should have withheld in the first two quarters of 1972 came to $21,028.98: $5,210.30 in the first quarter and $15,818.68 in the second quarter. The district court tacked onto these amounts interest from the due dates of each of Triple A's quarterly federal tax returns. Interest on the $5,210.30 for the first quarter ran from April 30, 1972, and interest on the $15,818.68 ran from July 31, 1972.
In the first quarter, Metro advanced Triple A $33,081. Because 25 per cent of that sum is $8,270.25, and, even with interest, the $5,210.30 portion of the judgment for the first quarter will not exceed $8,270.25, Metro does not appeal the first-quarter portion of the judgment.
In the second quarter, Metro advanced Triple A $71,360.61, one quarter of which is $17,840.15. Because prejudgment interest charges will push the $15,818.68 liability for the second quarter over $17,840.15, Metro claims the district court should have limited the second-quarter portion of the judgment to $17,840.15.
Section 3505(b) of the Internal Revenue Code provides:
The only dispute here stems from the failure of Congress to define "liability" in the final sentence of this subsection. Does the 25 per cent limitation apply only to the unpaid payroll taxes, or does it operate as a limit upon total liability, including taxes and prejudgment interest?
The government notes that, while the clause that imposes liability on the third-party supplier refers to the inclusion of interest, the last sentence, which limits liability, does not. Hence, the government argues that the limitation of "liability", as used in that sentence, should not apply to prejudgment interest because interest is not specifically mentioned there.
Close scrutiny of the subsection as a whole, however, exposes the weakness of this argument. While Congress thought it necessary to include a reference to "interest" in the clause imposing liability, it appended that reference to the word "taxes", not "liability": "(S)uch lender, surety, or other person shall be liable * * * in a sum equal to the Taxes (together with interest) which are not paid over to the United States * * *." Congress may have thought that the word "liability" would include both taxes and interest, a reasonable thought. So thinking, Congress could have had good reason (brevity) for not adding a reference to interest when it said, "(T)he liability of such lender, surety, or other person shall be limited * * *."
Indeed, one district court has recently ruled that "liability" as used in the last sentence so clearly includes interest that any regulation to the contrary is void. Taubman v. United States, 449 F.Supp. 520, 78-2 U.S.Tax Cas. (CCH) P 9552 (E.D.Mich.1978). While we do not agree with the Taubman court that the statute's meaning is plain, we reject the government's argument based on statutory language. Our reading of the subsection convinces us that the provision is so ambiguous that it has no "plain meaning" on the issue at hand. As Metro points out, the last sentence does not say "liability for taxes and interest", but it does not say "liability for taxes only" either.
The legislative history is equally inconclusive. The taxpayer points to language in a committee report that liability should be limited "in any event" to 25 per cent of the amounts supplied. But this history begs the question of the definition of the term "liability".
Metro next refers to section 6601(e)(1) of the Code, which provides that the use of the word "tax" in the Code generally includes interest charges as well as the basic tax. If section 6601(e)(1) applied to section 3505(b) at all, however, one wonders why Congress apparently felt it had to insert the parenthetical phrase "(together with interest)" after the word "taxes" in the liability clause of section 3505(b). Moreover, the problem with the limitation sentence is in defining "liability"; the word "tax", of which section 6601(e)(1) speaks, appears nowhere in that decisive final sentence.
In the first reported case dealing with the question before us, a district court concluded that a proper construction of section 3505(b) includes prejudgment interest in the definition of the "liability" limited. In United States v. Terry P. Smith, Inc., 75-2 U.S.Tax Cas. (CCH)...
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