Avco Delta Corp. Canada Ltd. v. U.S.

• Decision Date: 23 July 1976
• Docket Number: No. 75-1705,75-1705
• Citation: 540 F.2d 258
• Parties: 76-2 USTC P 9570 AVCO DELTA CORPORATION CANADA LIMITED, Plaintiff, v. UNITED STATES of America, Defendant-Appellee, v. NATURAL GAS PIPELINE COMPANY OF AMERICA et al., Third Party Defendants-Counterclaimants, v. CANADIAN PARKHILL PIPE STRINGING, LTD., et al., Counter Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 258

540 F.2d 258

76-2 USTC P 9570

AVCO DELTA CORPORATION CANADA LIMITED, Plaintiff, v. UNITED STATES of America, Defendant-Appellee, v. NATURAL GAS PIPELINE COMPANY OF AMERICA et al., Third Party Defendants-Counterclaimants, v. CANADIAN PARKHILL PIPE STRINGING, LTD., et al., Counter

Defendants-Appellants.

No. 75-1705.

United States Court of Appeals Seventh Circuit.

Argued Jan. 22, 1976.

Decided July 23, 1976.

Frank O. Wetmore II, Chicago, Ill., for appellant.

Scott P. Crampton, Daniel F. Ross, Tax Div., Dept. of Justice, Washington, D. C., Donald B. Mackay, U. S. Atty., Springfield, Ill., John Scripp, Milwaukee, Wis., Arthur R. Kingery, Peoria, Ill., Jackson P. Newlin, Peoria, Ill., for defendant-appellee.

Before FAIRCHILD, Chief Judge, CUMMINGS, and PELL, Circuit Judges.

PELL, Circuit Judge.

Two issues are presented for review on this appeal: first, whether the Parkhill Companies ¹ were denied due process of law in a trial, and second, whether the district court erred in sustaining the Government's contention that the assets of all three companies could be used to satisfy the tax liabilities of one company.

Canadian Parkhill Pipe Stringing, Ltd. (LTD) is a Canadian corporation formed in about 1951 which has engaged in the business of "stringing" and laying gas pipe lines in Canada. Canadian Parkhill Pipe Stringing, Inc. (INC), also known as Parkhill Pipeline Inc. as a result of a name change, is a New York corporation formed in 1962. It is a wholly owned subsidiary of LTD and was formed for the purpose of carrying out pipe laying and related projects in the United States. Canadian Parkhill Construction Equipment, Ltd. (CONSTRUCTION) is a Canadian corporation formed in 1967. It is also a wholly owned subsidiary of LTD and was formed for the purpose of owning and leasing pipe stringing and laying equipment. In 1967 the equipment owned by LTD was transferred to CONSTRUCTION in keeping with a policy that all equipment would be owned by CONSTRUCTION and leased to the other companies as well as to non-affiliated companies. INC rented equipment from dealers in addition to renting from CONSTRUCTION. Typically the rental agreements with dealers would contain an option to purchase, and if such an option was exercised, it would be exercised by CONSTRUCTION. The purpose of this policy, according to Parkhill's brief, was to take advantage of certain Canadian tax laws permitting expensing rather than capitalizing-depreciating the amounts involved in the purchases.

H. B. Sceats was at all material times the president of the Parkhill companies and owned seventy percent of the stock of LTD. The remaining thirty percent was owned by Richard Leonard, the vice-president. Sceats' office was in Toronto, Canada, all three Parkhill companies sharing office space, staff, and equipment and having the same address in Toronto, although only LTD's name was on the door. Leonard was in charge of the field operations of the companies and regularly had his office in a field trailer at a project site.

As a result of losses incurred on a pipe laying project for Natural Gas Pipeline Company in Illinois, INC was unable to pay the third quarter withholding on wages reported for that period. When Sceats sought further information from the field offices on the amount of these losses, Leonard would not allow access to field office records, apparently due to a dispute between them over control of the company.

For the purpose of raising funds with which to pay the withholding taxes, $600,000 was borrowed from Avco Delta Corporation Limited (Avco Delta). This loan was secured by a chattel mortgage executed by CONSTRUCTION, which company was also listed as debtor on the financing statement. The security on the mortgage was 29 pieces of heavy construction equipment. While CONSTRUCTION covenanted that it was the owner of the equipment, LTD and INC executed a guarantee and indemnity agreement wherein they agreed to guarantee payment as principal debtors of debts and liabilities of CONSTRUCTION to Avco Delta as well as indemnifying that company as to any losses resulting from the transaction. Nevertheless, the taxes were not paid because the proceeds of the loan were deposited in the Royal Bank of Toronto, which institution forthwith set off the money against a guarantee of an obligation of LTD to the bank for previous borrowings, the proceeds of which had been advanced to INC by LTD as a loan for the Natural Gas Pipeline job.

In February of 1970 the Internal Revenue Service seized all of the equipment which had been used by INC on the Natural Gas Pipeline job. It also seized other items located elsewhere in the United States. It served notices of levy upon Natural Gas Pipeline Company on the retainage it held on the Illinois project. Other levies made are not involved in this appeal. Pursuant to an agreement among the parties, the equipment was sold and the proceeds were placed in escrow.

Litigation emanating from that project has been before this court twice previously. The first instance arose from the suit of Avco Delta against the United States and the Parkhill companies in an endeavor to establish priority of the mortgagee's claim over that of the Government. Avco Delta prevailed in the district court with the judgment being affirmed here. 459 F.2d 436 (7 Cir. 1972). Avco Delta is no longer an active participant in the litigation. The sale of the mortgaged equipment, however, produced an excess of some $600,000 over the amount needed to pay off Avco Delta and that excess amount is involved in the present appeal.

The Parkhill companies urged that they would be denied due process of law in a trial if the funds levied upon by the United States were not released for their use to pay counsel and prepare their case because their other funds had been exhausted. ² The district court in advance or trial ordered funds released. The second appeal in part involved this issue. This court reversed, 484 F.2d 692, 707 (7th Cir. 1973), cert. denied, 415 U.S. 931, 94 S.Ct. 1444, 39 L.Ed.2d 490 (1974), holding:

The contention that the Government's actions will cause an unfair trial in the future is . . . capable of determination only after that trial takes place.

. . . The Government should be on notice, however, that we will carefully scrutinize any further appeals to see if in fact Parkhill has been denied due process of law by a constitutionally violative overreaching by the Internal Revenue Service. (Footnote omitted.)

This court remanded the case for proceedings not inconsistent with its opinion.

On remand, the district court appointed a practicing attorney as a special master to hear the remaining issues of the case, including the issues of the amount of tax liability and whether the assets of LTD and CONSTRUCTION could be used to satisfy the liabilities of INC.

Before the hearing the Government sought to require discovery and to require the presence of Sceats for that purpose in Illinois. That discovery was refused by the Parkhill companies on the grounds, inter alia, that the Government previously had access to all Parkhill records, that there had been suggestion of criminal proceedings against Sceats about which Government counsel had refused to answer any questions, and that Parkhill counsel suspected that the requested presence was a ruse to entice Sceats into the United States so that he could be arrested and held on criminal charges. During the time prior to the special master's hearing, counsel who had been regularly representing the Parkhill companies in this litigation, being the same counsel representing the companies on this appeal, participated in matters before the district court. The appearances included the filing of written objections to the Government's efforts to secure discovery.

Subsequently the Government moved for a default judgment against the Parkhill companies for failure to comply with the discovery requests. A response to this motion was filed on behalf of the companies. The district court, noting the time that had elapsed since the institution of litigation during with discovery could have been accomplished and also adverting to this court's caution against overreaching conduct on the part of the Government, denied the motion for default judgment.

The hearings before the special master commenced on November 20, 1974, and continued on the following day and November 27 resulting in a 283-page transcript. The Parkhill companies' counsel declined to participate in this hearing in any way. Nevertheless, the special master sua sponte did inquire into some of the Parkhill charges concerning claimed embezzlements. On April 21, 1975, the special master filed a detailed 33 page report ³ setting forth his findings of fact and conclusions of law, but noting that the proceedings were somewhat less than full adversary hearings as a result of the failure of the Parkhill companies to participate in them. He also observed that consequently "this portion of my report (pertaining to tax liability) can be little more than a rationalization and summary of the evidence presented by the Government."

The report stated that the Government had presented convincing proof of its charge that the Parkhill companies should be treated as one entity and that CONSTRUCTION and LTD should be liable for the debts of INC. The special master found that the Parkhill companies had failed to meet their burden of proof to overcome the Government's presumption of correctness regarding the taxes assessed and held that civil fraud penalties were properly assessed. He made meticulous findings regarding the various deficiencies alleged and concluded that the Parkhill companies owed taxes, interest and penalties incurred by INC of $2,470,233.98 plus interest and penalties accruing after September 23, 1974. The taxes included income tax deficiencies for 1967 and 1968 and withholding and FICA taxes for the third and fourth quarters of 1969. In accord...