Alioto v. United States

• Decision Date: 09 August 1984
• Docket Number: No. C-81-2143 RPA,C-82-0475 RPA and C-82-0919 RPA.,C-81-2143 RPA
• Citation: 593 F. Supp. 1402
• Parties: John I. ALIOTO, Plaintiff, v. UNITED STATES of America, Defendant. UNITED STATES of America, Plaintiff, v. Richard F. BROUDE, et al., Defendants. UNITED STATES of America, Plaintiff, v. UNION BANK, Defendant.
• Court: U.S. District Court — Northern District of California

593 F. Supp. 1402

John I. ALIOTO, Plaintiff, v. UNITED STATES of America, Defendant.

UNITED STATES of America, Plaintiff, v. Richard F. BROUDE, et al., Defendants.

UNITED STATES of America, Plaintiff, v. UNION BANK, Defendant.

Nos. C-81-2143 RPA, C-82-0475 RPA and C-82-0919 RPA.

United States District Court, N.D. California.

August 9, 1984.

COPYRIGHT MATERIAL OMITTED

Joseph Alioto, Alioto & Alioto, San Francisco, Cal., for plaintiff.

Jeffrey S. Niesen, U.S.Atty., San Francisco, Cal., for United States.

Bernard Petrie, San Francisco, for Hitt & Devereaux.

OPINION AND ORDER

AGUILAR, District Judge.

The above-captioned cases all revolve around the bankruptcy of the Pacific Far East Lines (hereinafter "PFEL") and the company's non-payment of payroll taxes withheld during the fourth quarter of 1977 and the first quarter of 1978. On November 10, 1983, the Court heard argument on a number of motions for summary judgment. Since the hearing, the Court has re-read the written arguments of counsel and has reviewed the documents submitted in connection with the motions. Based on these arguments and documents, and upon consideration of the relevant authorities, the Court hereby enters the following Opinion and Order addressing all of the motions before the Court.

I. Summary Judgment

Summary judgment is warranted where there is no genuine dispute as to a material fact and the moving party is entitled to prevail as a matter of law. Ybarra v. Reno Thunderbird Mobile Home Village, 723 F.2d 675, 677 (9th Cir.1984). In considering a motion for summary judgment, courts must view facts and draw inferences in the manner most favorable to the nonmoving party. United States v. Diebold Inc., 369 U.S. 654, 655, 82 S.Ct. 993, 994, 8 L.Ed.2d 176 (1962); Retail Clerks Union Local 648 v. Hub Pharmacy, Inc., 707 F.2d 1030, 1033 (9th Cir.1983). Summary judgment is not appropriate if contradictory inferences, one of which supports the nonmoving party's position, can be drawn from the facts. Sherman Oaks Medical Arts Center, Ltd. v. Carpenters Union No. 1936, 680 F.2d 594, 598 (9th Cir.1982).

II. Alioto v. United States, C-81-2143

A.

This action involves a penalty assessed by the Internal Revenue Commissioner (hereinafter "Commissioner") against John I. Alioto. Alioto was the president of PFEL and its wholly-owned subsidiary the Atlantic Bear Steamship Company (hereinafter "ABSC") unless otherwise specified the two companies will be referred to collectively as "PFEL" until mid-February 1978. James Hitt was PFEL's treasurer and William Devereaux was PFEL's controller at this time.

On January 31, 1978, PFEL filed a voluntary petition in bankruptcy; on February 3, 1978, ABSC did the same. The government contends that PFEL failed to pay $709,243.50 in payroll taxes that PFEL withheld from its employees during the fourth quarter of 1977 and the first quarter of 1978. The Commissioner assessed a 100% penalty against Alioto pursuant to section 6672 of the Internal Revenue Code. 26 U.S.C. § 6672.

Alioto brought this action, C-81-2143, seeking abatement of the penalty. He paid $200.00 of the assessment and claims jurisdiction under 26 U.S.C. § 7422. The government counterclaimed against Alioto, also naming Hitt and Devereaux as defendants, seeking entry of judgment in the amount of the penalty — $709,057.30 — against each defendant.

The matter is before the Court on Alioto's motion for summary judgment, in which Hitt and Devereaux join. Alioto moved for summary judgment once before and the Court denied the motion, finding material fact issues in dispute. Alioto v. United States, No. C-81-2143 (N.D.Cal. Nov. 24, 1981).

B.

The government argues that imposition of the 100% penalty against Alioto is warranted under the following statute:

Any person required to collect, truthfully account for, and pay over any tax imposed by this title who willfully fails to collect such tax, or truthfully account for and pay over such tax, or willfully attempts in any manner to evade or defeat any such tax or the payment thereof, shall ... be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over.

26 U.S.C. § 6672.

The Ninth Circuit has consistently held that the willfullness requirement is met "when a responsible officer voluntarily, consciously, and intentionally causes his corporation to pay creditors out of withheld funds while he is aware that such funds are owed to the United States." Maggy v. United States, 560 F.2d 1372, 1375 (9th Cir.1977). Thus, no showing of evil motive or intent to defraud the United States is required, Dudley v. United States, 428 F.2d 1196, 1198 (9th Cir.1970); but, it must be shown that the responsible officer knew the taxes were due. Id. at 1200-01.

On January 31, 1978, Alioto convened a meeting at PFEL's offices. In attendance were Alioto, Hitt, Devereaux, James Boughey, and Richard Broude. Broude, a bankruptcy attorney, advised those in attendance that the withholding taxes would not have to be paid if a petition in bankruptcy were filed. On the basis of this advice, PFEL filed for bankruptcy and filed a payroll tax return, but did not pay the taxes that were due. The government does not dispute these facts.

Alioto makes three arguments in support of his position: (1) the failure to pay the taxes was not willful because he acted in good faith reliance on advice of counsel; (2) he did not have knowledge that the taxes were due because counsel had advised him that the taxes did not have to be paid; and (3) irrespective of counsel's advice, Alioto simply did not know that the taxes were due.

Alioto relies heavily on Gray Line Co. v. Granquist, 237 F.2d 390 (9th Cir.1956), to support the proposition that willfulness is negated by good faith reliance on advice of counsel. In Gray Line, the Commissioner assessed a 100% penalty against the company for failure to pay transportation taxes. The Ninth Circuit overturned the assessment, finding that Gray Line had acted in good faith and with reasonable cause as the company acted on the advice of both counsel and a Special Deputy Tax Collector. Id. at 395. Alioto argues that Gray Line should be controlling as PFEL acted in good faith reliance on Broude's advice.

The Court rejects this argument. While Gray Line has never been explicitly overruled, the clear weight of authority holds that willfullness is not negated because the action was taken in good faith and with reasonable cause. See e.g. Barnett v. United States, 594 F.2d 219, 221 (9th Cir.1979); Bloom v. United States, 272 F.2d 215, 223-24 (9th Cir.1959); accord Monday v. United States, 421 F.2d 1210, 1216 (7th Cir.1970); contra Newsome v. United States, 431 F.2d 742, 746-47 (5th Cir.1970) (very limited reasonable cause defense to willfullness recognized). Moreover, even assuming arguendo that Gray Line were applicable, it is readily distinguishable from the case before the Court. In Gray Line, the taxpayer relied not only on advice of counsel, but also on advice from a government agent. Here, PFEL relied solely on advice of counsel; therefore, the degree of reasonableness does not approach that found in Gray Line.

The Court also rejects Alioto's argument that because he relied on advice of counsel he lacked the knowledge that the taxes were due. Alioto relies on two Ninth Circuit opinions to support this argument: Ferrando v. United States, 245 F.2d 582 (9th Cir.1957), and Estate of Lang v. Commissioner, 613 F.2d 770 (9th Cir.1980). In both Ferrando and Lang, the Ninth Circuit examined the taxpayer's subjective knowledge of his tax liability in determining whether or not the assessment of a penalty for failure to file a tax return pursuant to 26 U.S.C. § 6651 was warranted.

Alioto argues analogously that a subjective knowledge standard should be adopted in cases involving the assessment of penalties pursuant to 26 U.S.C. § 6672. The Court declines to adopt such a standard for two reasons. First, in Ferrando and Lang, the court was reviewing the assessment of a penalty for failure to file a return. The statute authorizing penalties for failure to file a return specifies that the penalty is not warranted if "it is shown that such failure is due to reasonable cause and not due to willful neglect ...." 26 U.S.C. § 6651. The taxpayer's subjective knowledge goes to the existence of reasonable cause. See Lang, 613 F.2d at 774. The statute authorizing penalties for willful failure to pay over withheld taxes, 26 U.S.C. § 6672, does not, however, contain a reasonable cause exception and the Ninth Circuit does not recognize such an exception. Barnett, 594 F.2d at 221. Because the statutory authority for the two penalties is different, the Court finds Ferrando and Lang inapposite to the instant case.

Second, while the Ninth Circuit has held that willfulness requires that the taxpayer be aware that the taxes are due, e.g., Maggy, 560 F.2d at 1375, the court has also held that willfullness is not negated by the taxpayer's reasonable, but mistaken, belief that he is under no legal duty to pay the taxes. Pacific Nat'l Ins. Co. v. United States, 422 F.2d 26, 33 (9th Cir.1970). For example, in Teel v. United States, 529 F.2d 903 (9th Cir.1976), the State of Washington distrained the company's inventories to recover unpaid state taxes. Pursuant to an agreement with the state the inventories were released. The inventories were sold and the proceeds used to purchase new merchandise. Eventually, the company went bankrupt. The government assessed a section 6672 penalty against Teel, an officer of the financially-troubled corporation. Teel argued that he believed the agreement with the state relieved him of the obligation to pay withholding taxes. The court rejected this argument, holding that "a mistaken belief on the part of the responsible person that the tax need not or cannot be paid over does not suffice to render the failure to pay nonwillful." Id. at 906.

Thus, the...