Commonwealth Nat. Bank of Dallas v. U.S., 80-1953

• Decision Date: 15 January 1982
• Docket Number: No. 80-1953,80-1953
• Citation: 665 F.2d 743
• Parties: 82-1 USTC P 9149 COMMONWEALTH NATIONAL BANK OF DALLAS, et al., Plaintiffs-Appellants Cross Appellees, v. UNITED STATES of America, et al., Defendants-Appellees Cross Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 743

665 F.2d 743

82-1 USTC P 9149

COMMONWEALTH NATIONAL BANK OF DALLAS, et al Plaintiffs-Appellants Cross Appellees, v. UNITED STATES of America, et al., Defendants-Appellees Cross Appellants.

No. 80-1953.

United States Court of Appeals Fifth Circuit.

Jan. 15, 1982.

Durant, Mankoff, Davis, Wolens & Francis, Bruce A. Budner, Turner, Hitchins, McInerney, Webb & Hartnett, John W. Hicks, Jr., Dallas, Tex., for Commonwealth Nat. Bank and Pittman.

Allen, Knuths, Cassell & Short, Robert F. Henderson, Dallas, Tex., for Dennie.

Glenn L. Archer, Jr., Asst. Atty. Gen., Tax Div., Dept. of Justice, Michael L. Paup, Chief, Appellate Section, Tax Div., Dept. of Justice, Washington, D. C., Martha Joe Stroud, Asst. U. S. Atty., Dallas, Tex., John F. Murray, Gilbert S. Rothenberg, R. Bruce Johnson, Attys., Tax Div., Dept. of Justice, Washington, D. C., for the U. S.

Appeals from the United States District Court for the Northern District of Texas.

Before POLITZ and RANDALL, Circuit Judges, and PARKER ^*, District Judge:

RANDALL, Circuit Judge:

This is an appeal from a judgment of the district court, pursuant to a special jury verdict, holding the plaintiffs-appellants herein-the lending bank to a corporate employer, the chief executive officer of the lending bank and the chief executive officer of the corporate employer-each liable for the 100% penalty imposed by I.R.C. § 6672 when the corporate employer failed to pay over to the United States federal employment taxes withheld from its employees. The lending bank and its chief executive officer assert that the decision of this court in United States v. Hill, 368 F.2d 617 (5th Cir. 1966), mandated the entry by the district court of a directed verdict in their favor and now mandates reversal of the judgment against them. The United States argues that this case is factually distinguishable from Hill or, alternatively, that Hill is no longer "good law" as a result of the decision of the Supreme Court in Slodov v. United States, 436 U.S. 238, 98 S.Ct. 1778, 56 L.Ed.2d 251 (1978), and several decisions in other circuits distinguishing or declining to follow Hill. We conclude that what we view as the basic principles underlying this court's decision in Hill, and numerous other decisions of this court under § 6672 as well, continue to be good law and, when applied to the facts of this case, require us to affirm the judgment of the district court holding each of the plaintiffs-appellants liable for the 100% penalty under § 6672.

I. FACTS.

Concrete Pan Forms, Inc. ("CPF") was a Texas corporation which operated as a subcontractor handling the concrete construction portions of major construction jobs. Richard L. Dennie, a plaintiff-appellant herein, was one of the original incorporators of CPF and served as CPF's chairman of the board, president and treasurer from 1965 until April of 1977. During the period in issue in this case, Dennie owned 93.75% of the stock of CPF.

Dennie became acquainted with John H. Pittman, another plaintiff-appellant herein, in 1966 while Pittman was serving as the president of the White Rock National Bank. Both CPF and Dennie, individually, were clients of that bank. When Pittman subsequently formed the Commonwealth National Bank of Dallas ("Commonwealth" or the "bank"), another plaintiff-appellant herein, CPF and Dennie moved their respective accounts to Commonwealth, where they were maintained throughout the period in issue in this case. Commonwealth, Pittman and Dennie are sometimes referred to collectively herein as the "taxpayers." Pittman served as chairman of the board and president of Commonwealth from 1970 throughout the period in issue in this case, and he was also a substantial stockholder in Commonwealth.

CPF maintained two accounts at Commonwealth. One account was a general operating account which was used to pay suppliers and other bills; the other account was used exclusively as a payroll account and was funded by transfers from the general account.

In 1974, Commonwealth made a $400,000 loan to CPF which was guaranteed by the Small Business Administration. CPF's indebtedness to Commonwealth was secured by, inter alia, a security interest in all CPF's accounts receivable and the proceeds therefrom. In accordance with instructions from Commonwealth, CPF ordered its customers to make payment to CPF by delivering checks made payable jointly to Commonwealth and CPF. On April 16, 1976, Commonwealth arranged a $70,000 line of credit for CPF (increased to $90,000 on March 30, 1977).

In addition to these loans, Commonwealth also permitted CPF large overdrafts on its general account. From October 1976 through April 1977, the taxable period in issue in this case, CPF's general account at Commonwealth was in a continuously overdrawn state, despite the fact that CPF periodically deposited progress payments from various construction jobs into that account. The maximum amount of the overdraft each month ranged from a low of approximately $98,500 in October 1976 to a high of approximately $237,000 in April 1977.

The record reflects that each Friday, CPF prepared payroll checks for its employees and tax deposit checks for the federal employment taxes. During the period from October, 1976 to January or February 1977, these payroll and tax deposit checks, together with the accompanying tax forms, were delivered by CPF's bookkeeper either to Pittman or to John Douglas, a vice president and loan officer of Commonwealth. While the payroll checks were honored, the checks that were written to cover federal employment taxes were not. The tax deposit checks were kept by Douglas in a desk drawer in his office at Commonwealth. In January or February of 1977, Pittman returned the accumulated federal tax deposit checks to CPF. After that time, CPF's bookkeeper continued to prepare tax deposit checks, but the checks were kept by her in her own desk drawer.

While the foregoing facts were largely undisputed at trial, the question of who was, in fact, responsible for the failure to pay federal employment taxes was the subject of highly conflicting testimony. In view of the fact that the United States sought to assess the 100% penalty provided by I.R.C. § 6672 ¹ against each of Commonwealth, Pittman and Dennie, at trial Commonwealth and Pittman took the position that Dennie exercised exclusive control over the payment of CPF's federal employment taxes, and Dennie took the position that Commonwealth and Pittman were primarily responsible for determining which of CPF's many creditors (including the United States) were to be paid. Since the jury found that each of Commonwealth, Pittman and Dennie had a duty and responsibility to collect or pay over federal employment taxes to the United States, the evidence in favor of the United States as to the duty and responsibility of each, and the inferences reasonably drawn therefrom, must be accepted as true. United States v. Hill, 368 F.2d 617, 619 (5th Cir. 1966).

The record reflects that Dennie, as the chief executive officer of CPF, was responsible for supervising the payroll and check writing functions of CPF. He knew that federal employment taxes were not being paid during the taxable period in issue in this case, and he knew that other creditors were being paid. Beginning in the latter part of 1976, Dennie delivered the tax deposit checks to Pittman at Commonwealth with instructions that those checks covering the federal employment taxes should not be paid. As time went on, Dennie submitted lists to Pittman indicating which checks (invariably excluding the tax deposit checks) "had to be paid." According to Dennie, "the government can wait."

Pittman, in turn, knew that the federal employment taxes were not being paid. During the period from October 1976 until January or February 1977, the checks covering the federal employment taxes were accumulated in the desk drawer of Douglas. Pittman frequently conferred with Dennie in order to decide which creditors were going to be paid. Early in 1977, Pittman began going over the list of checks submitted by CPF and specifically deciding which ones would be honored and which ones would not. In some cases, Pittman signaled his approval of those checks to be honored by initialing the upper corner of the checks.

The total amount of payroll taxes withheld from CPF's employees but not turned over to the United States was $127,411.24. The Commissioner of Internal Revenue thereafter determined that Commonwealth, Pittman and Dennie were all persons who willfully failed to collect, truthfully account for or pay over such taxes within the meaning of § 6672. Consequently, the Commissioner assessed penalties against each of them in an amount equal to 100% of the taxes not paid over. The taxpayers paid several portions of the assessment and then sued for refunds in federal district court. The United States contested their rights to refunds and, in addition, counterclaimed for the amounts remaining unpaid on the assessments. In addition, the United States asserted liability against Commonwealth and Pittman under I.R.C. § 3505(b). ²

After consolidation of the cases for trial, the district court directed a verdict against the United States on the issue of Pittman's liability under § 3505(b). The United States does not contest that determination in this appeal. Over the United States' objection, the district court also determined, as a matter of law, that Commonwealth's liability under § 3505(b) should be based on 25% of the total net payroll, minus a portion of the accounts receivable deposited by CPF into its general account at Commonwealth. In so doing, the district court rejected the argument of the United States that each transfer of funds to the payroll account from the general account was, in view of the overdrawn status of the general account, an additional extension of credit to CPF for the specific purpose of paying wages. The court, instead, accepted Commonwealth's...