Bauer v. United States, 102-74.

• Decision Date: 20 October 1976
• Docket Number: No. 102-74.,102-74.
• Citation: 543 F.2d 142
• Parties: Eldon E. BAUER v. The UNITED STATES.
• Court: U.S. Claims Court

543 F.2d 142

Eldon E. BAUER v. The UNITED STATES.

No. 102-74.

United States Court of Claims.

October 20, 1976.

J. Kevin Mahoney, Rochester, N. Y., atty. of record, for plaintiff. Harris, Beach & Wilcox, Rochester, N. Y., of counsel.

Patricia B. Tucker, Washington, D.C., with whom was Asst. Atty. Gen. Scott P. Crampton, Washington, D.C., for defendant. Theodore D. Peyser and Robert S. Watkins, Washington, D.C., of counsel.

Before COWEN, Chief Judge, and DAVIS and BENNETT, Judges.

OPINION

PER CURIAM:

This case comes before the court on defendant's motion, filed July 22, 1976, pursuant to Rule 141(b), requesting that the court adopt, with a modification, the recommended decision of Trial Judge Louis Spector, filed June 16, 1976, pursuant to Rule 134(h), as the basis for its judgment in this case. Upon consideration thereof, without oral argument, it appears that plaintiff has filed no intention to except to the trial judge's recommended decision and that the time for so filing pursuant to the Rules of the court has expired. Since the court agrees with the trial judge's recommended decision (with the modification requested by defendant), as hereinafter set forth^*, it hereby affirms and adopts the same as the basis for its judgment in this case. Therefore, it is concluded that plaintiff is entitled to recover and judgment is entered for plaintiff with the amount of recovery to be determined pursuant to Rule 131(c). Defendant's counterclaim is dismissed.

OPINION OF TRIAL JUDGE

SPECTOR, Trial Judge:

This is a tax refund suit to recover the sum of $421.35, plus interest, paid by plaintiff in partial satisfaction of a 100 percent penalty of $69,022.39 assessed by the Internal Revenue Service. The defendant has counterclaimed for the balance of the assessment, plus interest, and a lien fee.

Resolution of the case hinges upon application of the relevant facts, to the following pertinent provisions of the Internal Revenue Code of 1954:

RULES FOR APPLICATION OF ASSESSABLE PENALTIES

(a) Penalty Assessed as Tax. — The penalties and liabilities provided by this subchapter shall be paid upon notice and demand by the Secretary or his delegate, and shall be assessed and collected in the same manner as taxes. Except as otherwise provided, any reference in this title to "tax" imposed by this title shall be deemed also to refer to the penalties and liabilities provided by this subchapter.

(b) Person Defined. — The term "person", as used in this subchapter, includes an officer or employee of a corporation, or a member or employee of a partnership, who as such officer, employee, or member is under a duty to perform the act in respect of which the violation occurs. 26 U.S.C. § 6671. Emphasis supplied.

FAILURE TO COLLECT AND PAY OVER TAX OR ATTEMPT TO EVADE OR DEFEAT TAX

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, in addition to other penalties provided by law, be liable to a penalty equal to the total amount of the tax evaded, or not collected, or not accounted for and paid over. No penalty shall be imposed under section 6653 for any offense to which this section is applicable. 26 U.S.C. § 6672. Emphasis supplied.

Plaintiff's former employer, Management and Technology, Inc. (hereinafter MATI), failed to pay over withholding taxes with respect to wages paid to employees of MATI during the last two calendar quarters of 1970. The 100 percent penalty has been levied by IRS against plaintiff individually on the grounds that he was a person, within the contemplation of the code above-quoted, under a duty to collect and pay over these withholding taxes, but that he willfully failed to do so. This case, therefore, has essentially two issues — was plaintiff's position with MATI during the pertinent period such that he had the duty to collect and pay over taxes within the meaning of the code; and, if such a duty is found to exist, was plaintiff's failure to discharge that duty willful.

MATI, as the employer, was required to withhold income and Federal Insurance Contributions Act taxes from the salaries of its employees. 26 U.S.C. §§ 3102(a), 3402(a). Taxes thus withheld by an employer are deemed to be held in trust for the United States, and must be paid over to IRS at the end of each calendar quarter. To insure collection and payment of these withholdings, the code imposes the above-described 100 percent penalty, equal to the amount of the taxes which are not so collected and paid over. The penalty is imposed on all responsible persons who, by virtue of their status within the employer-business, had fiscal control such as to invest them with the duty to collect and pay over withholding taxes. It is defendant's position that plaintiff was such a person.

On the same grounds, defendant is also seeking to collect the same 100 percent penalty (which it may collect, however, only once), from Richard C. Williams, then president of MATI, and from John Rodgers, then secretary-treasurer of MATI. Their litigation is currently pending in the U.S. District Court for the Western District of New York.

Plaintiff has had a long career in the photofinishing aspects of the photography business. In the early 1960's he became a director of a company called A & R Color Labs, Inc. (hereinafter A & R). Thereafter, in approximately August 1968, plaintiff became president and a shareholder of A & R. A & R was in the business of developing film and making color print products for the professional photographic trade. Plaintiff's work experience for over 30 years prior to the period in question has been entirely of a technical, and not of a fiscal, nature. His training and experience have been directed primarily toward the production functions of photofinishing.

While president of A & R, his duties had similarly been of a technical nature, and he relied upon the treasurer and comptroller of A & R, one Donald Sand, to handle the financial and accounting affairs of the company, including preparation of financial statements, tax returns, and the filing and payment of taxes. In October 1968, plaintiff was asked to become a director of MATI. He was not duly elected a director. However, he served as a director, participated in most MATI board meetings, and erroneously believed that he had been properly elected to that office as of October 1968.

In 1968 MATI consisted of an optical division and a photographic bellows division, both the continuations of two separate businesses earlier acquired by MATI. Then in 1969, MATI acquired A & R in an exchange of stock, as the result of which plaintiff became the owner of over 200,000 shares of MATI, making him one of the company's five largest shareholders. Thereafter, plaintiff's former company, A & R, was operated as a subsidiary of MATI. The professional photofinishing business of A & R remained essentially the same after its acquisition by MATI, as it had been prior to that acquisition. Plaintiff retained his title as president of A & R. He also became manager of operations for the photofinishing division of MATI, which was comprised of A & R, and the two other similar businesses previously acquired by MATI.

As manager of operations for MATI's photofinishing division, plaintiff's duties remained as they had always been, technical in nature. He was in charge of production, quality control, and scheduling. All of the accounting and financial affairs of A & R, and of the two previously acquired businesses, were assumed and performed by MATI. The treasurer of A & R, Donald Sand, became treasurer of MATI following the acquisition, and he continued to be responsible for preparing and filing quarterly employment tax returns, and paying the withholding taxes. As treasurer, he reported directly to the president, Richard C. Williams.

Mr. Williams had become president of MATI in approximately 1967. He thereafter continued in that office through the last two quarters of 1970, the period in question. He was also chairman of the board. Williams had, before coming to MATI, been the treasurer and comptroller of another business where he was responsible for and was familiar with the preparation, signing and filing of corporate tax returns.

MATI was under-capitalized from its inception and Williams engaged in constant efforts to obtain additional operating capital. As early as February 1970, he was aware that MATI was not currently meeting its employee withholding tax obligations. The company was also plagued by substantial debts throughout its existence. This condition was common knowledge, and was known to plaintiff who, with other members of MATI management, had personally borrowed funds in 1968 totaling $100,000. The company did not meet the interest payments and, in May 1970, converted these loans, including plaintiff's, to MATI stock.

During the year 1970 the business affairs of MATI were conducted in a lax, informal manner, without the customary corporate formalities. There were no shareholder meetings during that year, and no written notice of a board of directors' meeting was issued by the secretary in 1970. No formal meetings of the board of directors took place after January 7, 1970. During the last two quarters of 1970 there were only two directors of MATI although the by-laws required three. An executive committee of the board, formed in January 1970, was not duly constituted since it contained only two director-members, and the MATI by-laws required at least three. No formal financial reports were prepared for MATI directors on a regular or current basis during 1970, nor were they issued information concerning delinquent employee withholding taxes.

Although he had served without the requisite formalities as if he were a director of MATI since October 1968, plaintif...